Carrying costs

Definition

Carrying costs are the expenses a company incurs to hold and store its inventory over a specific period. These include storage costs, insurance, taxes, and opportunity costs associated with holding inventory.

5 Must Know Facts For Your Next Test

1. Carrying costs can significantly impact a company's profitability and cash flow.
2. They typically include storage fees, insurance premiums, depreciation, and obsolescence.
3. Reducing carrying costs often involves optimizing inventory levels through better demand forecasting and efficient supply chain management.
4. High carrying costs may indicate excess or inefficient inventory management.
5. Companies must balance carrying costs with ordering costs to find the most cost-effective inventory strategy.

Review Questions

• What components make up carrying costs?
• How do carrying costs affect a company's profitability?
• What strategies can companies use to reduce their carrying costs?

Related terms

Ordering Costs: Expenses incurred in placing and receiving orders for inventory.

Stockout Costs: Costs associated with running out of stock, including lost sales and customer dissatisfaction.

Economic Order Quantity (EOQ): The optimal order quantity that minimizes the total inventory holding and ordering costs.