What is a carrying cost?

Definition: A carrying cost is the expense associated with holding inventory over a period of time. In other words, it’s the cost of owning, storing, and keeping inventory to be sold to customers. What Does Carrying Cost Mean? In managerial accounting, there are many different costs associated with inventory beyond its actual cost.

How much is a business' inventory carrying cost?

A business' inventory carrying costs will generally total about 20% to 30% of its total inventory value. Total carrying costs are often shown as a percentage of a business' total inventory in a particular time period. The figure is used by businesses to determine how much income can be earned based on current inventory levels.

What are some examples of carrying charges?

Examples of carrying charges include insurance costs, storage costs, and interest charges on borrowed funds. These costs are also sometimes referred to as an investment’s cost of carry . Since carrying charges increase the cost of an investment, they put downward pressure on that investment’s expected return.

Why do distributors incur a carrying cost?

Firstly, distributors will often return any unsold goods to the company, incurring a carrying cost and also developing a backlog of product inventory. It is sometimes referred to as a carrying cost of money. Inventory represents an investment with its associated investment interest or inventory carrying cost.