Inventory Carrying Cost

Apr 11, 2019

Inventory carrying costs of a company can be classified as follows;

  1. Opportunity Cost (Capital Cost): The opportunity cost of holding inventory. This should be based on the company’s cost of capital (mainly libor based ( using the following formula; Cost of Capital x Average Net Value of Inventory
  2. Storage and Handling Costs: Costs related with the physical environment and inventory handling.
  3. Shrinkage: The costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains to the loss of material through handling damage, theft, or neglect.
  4. Insurance and Taxes: The cost of insuring inventories and taxes associated with the holding of inventory.
  5. Total Obsolescence for Raw Material, WIP (Work in Progress), and Finished Goods Inventory: Inventory reserves have taken due to obsolescence and scrap and include products exceeding the shelf life, i.e., spoils and is no good for use in its original purpose. It also includes distribution channel obsolescence: