Inventory Carrying Cost Calculator Formula
Understand the math behind the inventory carrying cost calculator. Each variable explained with a worked example.
Formulas Used
Total Annual Carrying Cost
total_carrying_cost = storage_costs + insurance_taxes + shrinkage_obsolescence + (avg_inventory_value * opportunity_cost_pct / 100)Carrying Cost as % of Inventory
carrying_cost_pct = avg_inventory_value > 0 ? ((storage_costs + insurance_taxes + shrinkage_obsolescence + (avg_inventory_value * opportunity_cost_pct / 100)) / avg_inventory_value) * 100 : 0Opportunity Cost of Capital
opportunity_cost = avg_inventory_value * opportunity_cost_pct / 100Variables
| Variable | Description | Default |
|---|---|---|
avg_inventory_value | Average Inventory Value(USD) | 500000 |
storage_costs | Annual Storage Costs (rent, utilities)(USD) | 30000 |
insurance_taxes | Insurance & Taxes on Inventory(USD) | 10000 |
shrinkage_obsolescence | Shrinkage & Obsolescence(USD) | 15000 |
opportunity_cost_pct | Opportunity Cost of Capital(%) | 8 |
How It Works
How to Calculate Inventory Carrying Cost
Formula
Carrying Cost = Storage + Insurance/Taxes + Shrinkage/Obsolescence + (Inventory Value x Opportunity Cost %) Carrying Cost % = Total Carrying Cost / Average Inventory Value x 100
Carrying cost is the hidden price of holding inventory. Beyond the obvious warehouse rent, it includes capital tied up that could earn returns elsewhere, products that expire or become obsolete, theft and damage, and insurance premiums. Typical carrying costs range from 20-35% of inventory value annually.
Worked Example
A company holds $500,000 in average inventory with $30,000 storage, $10,000 insurance/taxes, $15,000 shrinkage, and 8% opportunity cost.
- 01Opportunity Cost = $500,000 x 8% = $40,000
- 02Total Carrying Cost = $30,000 + $10,000 + $15,000 + $40,000 = $95,000
- 03Carrying Cost % = ($95,000 / $500,000) x 100 = 19%
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