Inventory carrying cost is what it costs to hold stock for a year: the money tied up in it, the space it takes, insurance and taxes, and what you lose to shrinkage and obsolescence. Add up those four annual rates and multiply by your average inventory value. Enter your figures in the calculator below to get your annual and monthly carrying cost, the biggest component, and the per-unit holding cost the EOQ formula asks for.
A free tool to put a number on what your stock costs you just by sitting on the shelf.
Stock on the shelf looks like an asset, and on the balance sheet it is. But every unit you hold is also costing you money while it waits to sell: cash you cannot use elsewhere, rent on the space it fills, a premium to insure it, and the slow loss of the items that get damaged, go missing or stop selling. None of that shows up on the purchase invoice, which is why it is so easy to underestimate.
This calculator adds those costs up into one annual figure. The tool comes first, then a worked example, how to set each rate from your own books, and how the result feeds straight into your order quantities.
Inventory carrying cost calculator
What is inventory carrying cost?
Inventory carrying cost, also called holding cost, is the total cost of keeping stock on hand over a year. It is normally expressed as a percentage of your average inventory value, because most of its parts grow with the value of what you hold: twice the stock ties up twice the cash and needs roughly twice the insurance. For a longer introduction, see our guide to inventory carrying cost.
The four components
The calculator uses the four conventional buckets. Enter each as an annual percentage of average inventory value:
- Cost of capital: the money tied up in stock. If you borrow to buy inventory, it is the interest rate on that borrowing; if you pay cash, it is the return that money could have earned elsewhere.
- Storage and handling: warehouse rent, utilities, racking, and the labor of receiving, moving and counting stock.
- Insurance and taxes: the premium to insure your stock, plus any tax charged on holding inventory where you operate.
- Shrinkage and obsolescence: value lost to shrinkage (theft, damage, miscounts) and to stock that expires, goes out of fashion or stops selling.
What belongs in each bucket is your call. The one rule is to count every cost once. The usual mistake is putting warehouse rent in storage and again in a general overhead figure, which inflates the total.
How the calculation works
The formula is short:
Annual carrying cost = average inventory value x (cost of capital + storage and handling + insurance and taxes + shrinkage and obsolescence)
The calculator also divides the annual figure by 12 for a monthly cost, names the largest of the four components so you know where to look first, and, if you enter your average units on hand, works out the cost per unit per year:
Carrying cost per unit per year = annual carrying cost / average units on hand
Average inventory value is the value of stock you typically hold across the year, not the figure on one particular day. A simple way to get it is to add up the inventory value at each month end and divide by the number of months. The optional units field works the same way, using average units on hand.
Worked example, step by step
The calculator opens on this example:
- Average inventory value: $250,000.
- Cost of capital: 8% a year.
- Storage and handling: 6% a year.
- Insurance and taxes: 2% a year.
- Shrinkage and obsolescence: 4% a year.
- Average units on hand: 10,000.
First add up the rates: 8% + 6% + 2% + 4% = 20%. Then apply the total to the inventory value:
Annual carrying cost = $250,000 x 20% = $50,000 a year.
Divide by 12 for the monthly figure: $50,000 / 12 = $4,166.67 a month. Broken down by component, cost of capital is $250,000 x 8% = $20,000, storage and handling $15,000, insurance and taxes $5,000, and shrinkage and obsolescence $10,000, which adds back up to $50,000. The largest component is cost of capital at 8%.
Finally, the per-unit figure:
Carrying cost per unit per year = $50,000 / 10,000 units = $5.00.
A quick sense check: $250,000 across 10,000 units is an average of $25 a unit, and 20% of $25 is $5.00. Load these figures into the calculator above and you should see $50,000.00 a year, $4,166.67 a month, cost of capital as the largest component, and $5.00 per unit per year.
What carrying cost rate should you use?
There is no single right rate, and a figure borrowed from someone else's business can be badly wrong for yours. Rent, interest rates and the way your products age all vary. The better approach is to build each rate from your own numbers, then treat the total as your own input:
- Cost of capital: use the interest rate on the credit line or loan that funds your stock. If you fund it from cash, use the return you expect from other uses of that cash.
- Storage and handling: take the annual cost of the space and labor that go to holding stock, and divide by average inventory value.
- Insurance and taxes: take the annual premium on your stock plus any inventory tax, and divide by average inventory value.
- Shrinkage and obsolescence: take a year of stock write-offs and adjustments for loss, damage and dead stock, and divide by average inventory value.
The 8%, 6%, 2% and 4% in the example are there to show how the calculation works, not as a benchmark. If your rates add up to more than 100%, the calculator warns you, since that means holding the stock for a year costs more than it is worth. At that level the likeliest explanation is a rate typed as 0.25 instead of 25.
How carrying cost feeds EOQ
Carrying cost is not only a number for a cost report. It is one of the three inputs to economic order quantity, the order size that balances the cost of placing orders against the cost of holding stock. The EOQ formula asks for the annual holding cost per unit, which is exactly the per-unit figure this calculator returns:
EOQ = square root of ((2 x annual demand x ordering cost per order) / holding cost per unit per year)
In the example, that input is $5.00. Enter it in the EOQ calculator alongside your own annual demand and ordering cost. Because holding cost sits under the square root, it moves EOQ less than you might expect: doubling the holding cost cuts the economic order quantity by about 29%, not by half. But it moves it in the direction that matters. The more a unit costs to keep, the smaller and more frequent your orders should be.
When carrying cost is a warning sign
A carrying cost figure is most useful as a way to see what slow stock is really costing you. Every unit that sits for a year costs its share of the total, and stock that never sells costs it year after year until it is written off.
If shrinkage and obsolescence is your largest component, or your total rate keeps climbing, look at what is not moving. Dead stock is inventory that has stopped selling altogether, and excess inventory is stock held beyond what demand needs. Both push your average inventory value up and add to carrying cost without adding sales. Cutting them lowers the cost twice: less value to carry, and less stock to lose to obsolescence.
How Qoblex helps with carrying cost
The calculator above is a planning aid you run by hand. Qoblex does not calculate carrying cost for you, and the rates are yours to set. What it gives you is the numbers the calculation starts from.
The Stock on Hand report shows quantity and value for every variant against the live position, with unit cost beside it. Finding out what your inventory is worth is a screen you open, not a file somebody rebuilds at month end, so the average inventory value and units on hand this calculator asks for are figures you can read rather than estimate. That value comes from inventory costing that stays current: moving average cost is the default, FIFO is supported too, and freight and duty recorded on a purchase order are included in the unit cost.
To act on the slow stock that drives carrying cost up, the Inventory Aging report buckets your stock by how long it has been sitting there, and from the report you can set a new retail price on the slow lines. Your accounting platform stays the book of record. For current plans, see qoblex.com/pricing.
Carrying cost is one of several numbers that work together. This tool prices the cost of holding stock; the EOQ calculator turns that into how much to order; and the inventory turnover calculator shows how quickly that stock sells through and gets replaced.
FAQ
What is inventory carrying cost? Inventory carrying cost is what it costs to hold stock over a year: the money tied up in it, the space it takes, what you pay to insure it and any taxes on it, and what you lose to damage, theft and obsolescence. It is usually expressed as a percentage of your average inventory value, and it is also called holding cost.
How do you calculate inventory carrying cost? Add up your annual rates for cost of capital, storage and handling, insurance and taxes, and shrinkage and obsolescence, then multiply the total by your average inventory value. At $250,000 of average inventory and rates of 8% + 6% + 2% + 4% = 20%, carrying cost is $250,000 x 20% = $50,000 a year, or $4,166.67 a month.
What goes into the carrying cost rate? Four buckets. Cost of capital is the interest you pay, or the return you give up, on the money tied up in stock. Storage and handling covers the space and the work of looking after it. Insurance and taxes covers the policy on your stock and any tax charged on holding it. Shrinkage and obsolescence covers stock that is lost, damaged, stolen or no longer sellable. Count each cost in one bucket only.
What carrying cost rate should I use? Use rates built from your own figures rather than a borrowed benchmark. Take your borrowing rate or target return for cost of capital, divide annual storage, insurance and write-off costs by average inventory value to turn each into a percentage, and add them up. The 20% in this calculator's example is an illustration, not a recommendation.
How does carrying cost relate to EOQ? The EOQ formula needs a holding cost per unit per year, and that is exactly what this calculator returns when you enter your average units on hand. In the example, $50,000 a year over 10,000 units is $5.00 per unit per year. A higher holding cost pushes the economic order quantity down, because each extra unit ordered costs more to keep.
Does Qoblex calculate carrying cost for me? Qoblex does not calculate carrying cost. It gives you the starting point: the stock on hand report shows quantity and value for every variant against the live position, with unit cost beside it, so the inventory value this calculator needs is a screen you open rather than a number you guess. The rates are yours to set.