Carrying Costs
Carrying costs represent the cost incurred while inventories are stored in warehouses or stores. They are also referred to as holding costs or storage costs. The investment made in inventory does not provide immediate return, which it could have otherwise earned if the capital was invested in some other productive activities. Therefore, carrying costs include the opportunity costs besides storage costs (rent, lighting, refrigeration etc), staffing costs, equipment and maintenance costs, insurance costs, interest charges for financing the inventories, taxes, security and other expenses associated with holding materials in warehouses.
Loss of inventory due to pilferage, spoilage, or breakage in warehouses and the cost of obsolescence are also a part of the carrying costs. In general, carrying costs are expressed either as a percentage of material cost (generally between 25 to 35 percent) or as the actual amount incurred during storage of inventory in a warehouse for a year.
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