Inventory carrying cost, also called holding cost, is the cost of keeping inventory over time. It can be expressed as a dollar amount, an annual percentage of average inventory value, or an annual cost per unit. State which measure you are using before comparing purchase options.
For a buyer considering a volume discount or supplier minimum, carrying cost helps answer whether the lower purchase price justifies the extra stock. The answer also depends on demand, usable life, cash and the costs that actually change between the alternatives.
Carrying-cost formula
Annual carrying cost = average inventory value × annual carrying rate
Annual holding cost per unit = unit cost × annual carrying rate
The second expression can supply H in the basic EOQ formula, with separately measured per-unit costs added if they are not already included. A 22% annual rate is 0.22 in the calculation. Applying it to a quantity held for only part of a year requires a corresponding time adjustment.
For changing balances, estimate time-weighted average inventory or model the balance over time. Using total annual purchases as though all of them sit in stock for an entire year can greatly overstate holding cost.
What to include
| Component | Evidence to use | Avoid double counting |
|---|---|---|
| Capital | A chosen financing or opportunity-cost basis | Do not automatically add borrowing interest and a full alternative return for the same funds |