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Carrying Cost (Carrying Charge, Cost of Carry)
Definition and Meaning Explained

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

What is a carrying cost? What are the different kinds of carrying costs?

In business, the term carrying cost (or carrying charge, or cost of carry) is used in several different ways:

1. The primary meaning of carrying cost refers to one of the three major 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 can also refer to charges passed on from lenders to borrowers for maintining an open balance due. Monthly charges for a credit card account that is not fully paid off at the end of the month, for instance, are sometimes called carrying charges.

3. Carrying costs or carrying charges can also refer to charges on margin accounts with a broker. These are essentially interest charges on loans that are used to purchase investment bonds or stock shares. Carrying charges in this sense are sometimes (but not always) allowed as income deductions for tax purposes.

In all three cases, the terms carrying cost or carrying charge refer ti 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 its own right 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 can be defined as goods or materials owned by by the business, held ultimately for sale. Inventory in this sense is further classified as either manufacturing inventory (raw materials, work in process, or finished goods) or as merchandise inventory (goods ready for sale). In either case—merchandise or manufacturing inventory—the cost consequences of inventory ownership can be large

Very briefly, carrying costs are one of the three primary inventory cost categories, which are:

  1. Total stocking costs. These include all the costs of procurement and order, as well as inbound logistics costs (e.g., shipping costs).
  2. Loss or devaluation costs. These include cost of writing down inventory value (due to obsolescence, or spoilage, for instance) as well as loss costs from theft, or damage in storage.
  3. Carying costs. These are the costs of insuring, financing,storing, and handling inventory. Inventory carrying costs may include;
    • Storage costs: The costs of storing inventoray can include:
      • Costs of building or leasing storage warehousing structures.of storage.
      • Warehouse building operational and maintenance costs (e.g., utilities costs)
      • Inventory handling infrastructure, such as materials movement belts and forklift tractors).
      • Software and hardware systems dedicated to inventory tracking and inventory management).
      • Wages and salaries for employees for stock management andinventory administration.
      • Security system installation and maintenance, as well as wages and salaries for security guards.
    • Cost of Capital: Costs of financing purchases, costs of insurance, costs resulting from with legal liabilities.

Note that some business people prefer to consider "loss and devaluation" costs as "carrying costs, " as well. For accounting purposes, however, it dos not matter whether loss and devaluation costs are called "carrying costs." As mentioned, "carrying cost" is neither an account nor a budgeting categorie. The many cost items listed above appear in financial reports and in budgets under their own names.

For more on the management of inventory costs, see the online ncyclopedia article inventory.

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