What Is The Definition Of Carrying Costs?
The definition of carrying costs represent the cost associated with holding inventory for an extended period of time. They are an important part of inventory management and accounting because you can use them to determine the break-even point for a product.
How Do You Calculate Carrying Costs?
The calculation of carrying costs always comprises of a percentage of your total inventory value or the actual dollars spent holding inventory. Your inventory holding sum takes the cost of storage into account and other costs that are associated with storing inventory. For example climate control, insurance, security measures, or similar.
However, carrying costs doesn’t include the cost of labor and materials spent on making the product as well as sales salaries or commissions paid.
Who Needs To Calculate Carrying Costs & why?
Companies that deal with…
- Cost of storage (insurance, taxes, mortgage interest)
- Salaries for employees in charge of holding the inventory
- Purchasing and storing replacement inventory
- Shipping and handling costs
- Cost of Capital
Businesses should determine carrying costs to take measures against the effects of price fluctuations.
Real-Life Example For The Use of Carrying Cost
When a car manufacturer decides how many cars they plan on making in a year, they use the “Z-score” which is based on the number of days it takes for a car to be sold after it’s built. This would be the break-even point for a car.