Inventory Carrying Cost Calculator
- Cost of capital
- Storage
- Insurance and taxes
- Shrinkage and obsolescence
Every $1 of stock you hold for a year costs about 23.5 cents. Cutting average stock by $10,000 saves about $1,400 a year in capital and shrinkage cost, plus any storage you can give up.
How the inventory carrying cost calculation works
Value your average inventory
Average stock at cost, for example $100,000. Use (start + end) ÷ 2 if you count twice a year.
Price the money tied up
Multiply by your cost of capital. At 10%, $100,000 of stock costs $10,000 a year in interest or lost return.
Add storage, insurance and losses
$8,000 of storage, $1,500 of insurance and taxes, and 4% shrinkage and obsolescence ($4,000) bring the total to $23,500.
Turn it into a rate
$23,500 ÷ $100,000 = 23.5% a year. A $20 unit costs $4.70 a year to hold, which is the holding cost to enter in the EOQ calculator.
Worked example. A small online shop holds $100,000 of stock on average and funds it with a credit line at 10%. Storage costs $8,000 a year, insurance and taxes on the stock $1,500, and it writes off about 4% a year to damage and old stock. Carrying cost is $10,000 + $8,000 + $1,500 + $4,000 = $23,500 a year, or 23.5% of inventory value. A $20 unit costs $4.70 a year to hold.
Inventory Carrying Cost FAQ
What is the inventory carrying cost formula?
Carrying cost = cost of capital + storage + insurance and taxes + shrinkage and obsolescence + other holding costs, all for one year. As a rate: carrying cost ÷ average inventory value. With $23,500 of costs on $100,000 of stock, the rate is 23.5%.
How do I calculate the carrying cost of inventory?
Find your average inventory value at cost. Multiply it by your cost of capital and by your yearly shrinkage rate. Add the yearly storage, insurance and tax costs that come from holding stock. The sum is your carrying cost in dollars; divide it by inventory value for the percentage.
What is a normal inventory carrying cost percentage?
There is no single official figure; it depends on your interest rate, rent and how fast stock spoils or goes out of date. Perishable, fragile or fashion stock costs more to hold than bolts or paper. Work it out from your own costs here and compare with your own past years.
What cost of capital should I use?
The interest rate on the money that pays for your stock, such as your credit line or loan rate. If you pay with your own cash, use the return you could earn on it elsewhere. A higher rate makes holding stock more expensive.
Is carrying cost the same as holding cost?
Yes, the two terms mean the same thing. In the EOQ formula the holding cost (H) is the carrying cost per unit per year: unit cost × carrying cost rate. At 23.5%, a $20 unit has a holding cost of $4.70.
What is the holding cost formula per unit?
Holding cost per unit per year = unit cost × carrying cost rate, or total carrying cost ÷ average units in stock. Both give the same answer when units are valued at cost.
How can I lower my inventory carrying cost?
Hold less stock by ordering smaller amounts more often, sell or clear slow movers before they go out of date, and pay down the credit used to buy stock. The EOQ and reorder point calculators help you find a lower stock level that still avoids running out.