How to calculate inventory carrying costs?
Before you get started with the inventory carrying cost calculator, you need to know all the related expenses. Once you have these on hand, you can start going through the following inventory carrying cost formula to better understand how much holding inventory costs you.
First, you need to calculate the yearly cost of holding inventory:
The yearly cost of holding inventory = Capital costs + service costs + risk costs + space costs
Next, you need to work out your total inventory value:
The total inventory value = Sum of inventory costs x stock of available items
And for the final step, you can divide the results to get the percentage value of your inventory carrying cost:
Inventory carrying cost = Total cost of holding inventory / total value of inventory x 100
Let’s look at an example using the inventory carrying cost calculation for a factory with an inventory value of $85,000 over the past year:
- Cost of capital — $18,000
- Service cost — $4,500
- Inventory risk cost — $4,000
- Storage cost — $3,000
The yearly cost of holding inventory = $18,000 + $4,500 + $4000 + $3,000 = $29,500
Now you have the inventory holding cost. You can divide it by the annual inventory value and multiply it to calculate the percentage of your inventory carrying cost:
Inventory carrying cost = $29,500 / $85,000 x 100 = 35%
In this example, inventory carrying cost calculation shows that 35% of the total inventory costs are from keeping items stocked. But what is the number you should aim for?
The average carrying costs for most manufacturers is between 20% to 30%, though going below 20% means lower expenses for you. Using the inventory carrying cost formula can help you determine your percentage, and if it’s above average, you can start taking action to reduce this figure.