When you own a business, it’s quite important to consider lowering the costs. To maintain a steady supply chain, you need to understand the total cost of its supply chain. Inventory Carrying Cost helps companies to determine how much growth can be made on current inventory.
Inventory Carrying Cost is an accounting term, it is the amount that a company spends on holding inventory over a period of time, including all the investment involved in owning, storing, and holding the unsold goods or stocks.
Some notable costs are:
Inventory Carrying Cost is usually 15% – 30% of the value of the retailer or company’s inventory. This is a very significant number; it explains how long they preserve their inventory before they lose their money on unsalable stock or dead stock.
This also depicts how much they need to sell and purchase in order to maintain appropriate inventory levels. By calculating Inventory Carrying Costs, they can reclaim the company’s money which is stuck up in the inventory and eventually increase the profit.
Inventory Carrying Cost Formula can be defined as a percentage of the total value of the inventory. They are equal to the inventory holding sum divided by the total value of the inventory, which is then multiplied by 100.
Furniture retailer who carries inventory for all his models. The total value of his inventory is $80,000. His inventory holding sum is $ 20,000 (this includes the inventory cost, risk cost, capital cost, and storage cost). How much is his inventory carrying cost, which is expressed in percentage?
The Inventory Carrying Cost acquired by the furniture retailer is 25% of his inventory value. This cost shows that you will not run into extreme losses by holding inventory over a long period of time. The Inventory Carrying Cost should be within the limits of 20%- 30% of your total inventory value.
Inventory Carrying Costs plays a vital role in increasing or decreasing the profit of any retailer or manufacturer; therefore, it should be limited down as much as possible.
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