Find out what your stock really costs to keep. Enter average inventory value, the cost of capital, storage, insurance, taxes and obsolescence to see the annual carrying cost, the carrying cost rate as a percentage of inventory value, and the cost per unit.
Last updated:
Inventory value
$
$
$
Costs as % of inventory value per year
%
Interest rate on borrowing, or the return you could earn elsewhere.
%
%
%
Write-downs, theft, spoilage, expired stock.
Costs in money per year
$
Rent, utilities and depreciation of storage space.
$
Warehouse staff, equipment, inventory software.
Per unit (optional)
days
Shows the cost of holding one unit that long.
Enter your values to see the result.
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How to use the Inventory Carrying Cost Calculator
Enter average inventory value at cost, or beginning and ending values to average them.
Enter percentage costs: cost of capital, insurance, taxes and obsolescence or shrinkage, each per year.
Enter money costs for storage space and handling for the year.
Optionally add units on hand and days held to see the cost per unit.
Read the annual cost and rate, then check how much holding less stock would save.
Inventory carrying cost formula
Average inventory = (beginning inventory + ending inventory) ÷ 2, valued at cost
Holding cost per unit per year = unit cost × carrying cost rate
Example (default values): $400,000 of average inventory with 8% cost of capital, 1% insurance, 1% taxes and 4% obsolescence costs $56,000 a year. Adding $30,000 of storage and $12,000 of handling gives an annual carrying cost of $98,000, a carrying cost rate of 24.5%. With 20,000 units on hand that is $4.90 per unit per year, or about $0.81 to hold one unit for 60 days.
The components of carrying cost
Component
What it includes
Where to find the number
Capital cost
Interest or lost return on money tied up in stock
Loan or credit line rate, or your required rate of return
Storage
Warehouse rent, utilities, racking, building depreciation
Facility costs, or the share of space used for inventory
Payroll and equipment costs for storage activities
Insurance
Coverage on the value of goods in stock
Insurance policy premium for inventory
Taxes
Inventory or personal property taxes where they apply
Local tax bills (many places do not tax inventory)
Obsolescence, shrinkage, damage
Write-downs, expired goods, theft, breakage
Inventory adjustments and write-offs over the past year
Tips
Value inventory at cost, not at selling price, or the carrying cost will be overstated.
Do not ignore the capital cost. Stock paid for in cash still has an opportunity cost because that money could be used elsewhere.
Compare with margin. If an item's yearly carrying cost approaches its gross profit, it is a candidate for smaller orders, a price change or clearance.
Look at slow movers separately. The average rate hides items that sit for many months and carry most of the obsolescence risk.
Frequently asked questions
How do you calculate inventory carrying cost?
Carrying cost = capital cost + storage cost + insurance + taxes + obsolescence, shrinkage and handling, all for one year. Percentage items are multiplied by average inventory value. With $400,000 of inventory, 14% in percentage costs ($56,000) and $42,000 of storage and handling, the annual carrying cost is $98,000.
What is the carrying cost rate?
Carrying cost rate = annual carrying cost ÷ average inventory value × 100. In the example above, $98,000 ÷ $400,000 = 24.5%, meaning each dollar of stock costs about 24.5 cents a year to hold.
What is a typical inventory carrying cost percentage?
Commonly quoted ranges are about 15% to 35% of inventory value per year, but it varies widely with interest rates, warehouse costs and how quickly products lose value. Perishable, seasonal and fashion goods tend to be much higher.
What is the biggest part of carrying cost?
Often the cost of capital (the money tied up in stock) and obsolescence or shrinkage. When interest rates rise, the capital component increases, which makes holding excess inventory more expensive.
What cost of capital should I use?
Use the interest rate on the money that finances your inventory, such as a credit line, or the return you require on other investments if you pay with cash. Many businesses use their weighted average cost of capital.
How is carrying cost used in the EOQ formula?
The economic order quantity formula uses holding cost per unit per year, which equals unit cost × carrying cost rate. A higher carrying cost pushes the EOQ down toward smaller, more frequent orders.
How can I reduce inventory carrying costs?
Hold less stock by improving demand forecasts and reorder points, clear slow-moving items, negotiate smaller and more frequent deliveries, use space more efficiently and reduce shrinkage with better counting and security.
Are all the tools on FreeToolCabin tested for quality and accuracy?
Yes! Every tool on our site undergoes automated Q/A testing in real browser environments to ensure high precision, correct output, and zero errors. If you happen to spot a bug or have a suggestion, please contact us at [email protected] and our team will review it right away.