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Carrying Cost and Holding Cost
Explaining Carrying Charges in Inventory Management, Lending, and Investing

 

For businesses that sell or manufacture goods, the carrying costs for storing and handling inventory can be substantial. Successful inventory management is the art of making goods available to customers when they want them while keeping inventory carrying costs low.

Carrying Costs Usually Pass on to Customers—in One Way or Another

What is a Carrying Cost? What are the Different Kinds of Carrying Costs?

In business, carrying cost (or carrying charge, or cost of carry, or holding cost) has several different meanings:

1. The primary definition of carrying cost refers to one of the significant cost categories in inventory management. Inventory carrying costs in this sense can include the costs of insuring, financing, storing, and handling inventory.

2. Carrying cost also refers to charges that lenders passed on from lenders to borrowers for maintaining an open balance due. Monthly charges for a credit card account that has nonzero balance at the end of the month, for instance, are carrying charges.

3. For investors, carrying costs or carrying charges refers to margin account charges with a broker. These are essentially interest charges on loans to purchase investment bonds or stock shares. Tax authorities sometimes allow investors to claim these carrying charges as income deductions.

Carrying Cost Charges Appear But Under Different Names

In all three cases, the terms carrying cost or carrying charge refer to a cost category, almost never the name of a specific cost item.

  • "Carrying cost" very rarely appears as a line item or expense account name in on the Income statement. Instead, carrying cost expenses appear on the Income statement under several named accounts, such as "Warehouse insurance expense."
  • Borrowers and investors very rarely, if ever, receive a bill with a line item called "Carrying Cost." Instead, for instance, a monthly statement (bill) from the credit card issuer can include a charge for "interest."

Carrying Costs in Inventory Management

For companies that sell goods, inventory refers to as goods or materials the firm owns and holds ultimately for sale. Retail businesses typically call their inventory merchandise inventory. Firms that manufacture and sell goods hold manufacturing inventory, which they further classify either raw materials, work in process, or finished goods. In either case—merchandise or manufacturing inventory—the cost consequences of inventory ownership can be large

In most cases, carrying costs are one of three primary inventory cost categories:

  1. Total stocking costs.
    These costs include all the costs of procurement and order, as well as inbound logistics costs (e.g., shipping costs).
  2. Loss or devaluation costs.
    These costs include the expense of writing down inventory value due to obsolescence or spoilage, for instance, as well as loss costs from theft, or damage in storage.
  3. Carrying costs.
    These costs are the expenses of insuring, financing, storing, and handling inventory. Inventory carrying costs may include;
    • Storage costs. Inventory storage can bring costs for:
      • Building or leasing storage warehousing.
      • Warehouse building operations and maintenance (e.g., for utilities).
      • Inventory handling infrastructure, such as materials movement belts and forklift tractors.
      • Software and hardware IT systems for inventory tracking and inventory management.
      • Employee wages and salaries for managing stock and inventory administration.
      • Installing, operating, and maintaining security systems, as well as wages and salaries for security guards.
    • Cost of Capital: Costs of financing purchases, costs of insurance, costs resulting from legal liabilities.

Note that some business people prefer to consider "loss and devaluation" costs as "carrying costs, " as well. For accounting purposes, however, it does not matter whether loss and devaluation costs are called "carrying costs" because "carrying cost" that term neither an account nor a budgeting category. The many cost items listed above appear in financial reports and budgets under those names.

For more on managing inventory costs, see Inventory.

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