Classification of inventory carrying cost

Inventory carrying costs of a company can be classified as follows;

  1. Opportunity Cost (Capital Cost): The opportunity cost of holding inventory. This should be based on the company’s cost of capital (mainly libor based ( using the following formula; Cost of Capital x Average Net Value of Inventory
  2. Storage and Handling Costs: Costs related with the physical environment and inventory handling.
  3. Shrinkage: The costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains to the loss of material through handling damage, theft, or neglect.
  4. Insurance and Taxes: The cost of insuring inventories and taxes associated with the holding of inventory.
  5. Total Obsolescence for Raw Material, WIP (Work in Progress), and Finished Goods Inventory: Inventory reserves have taken due to obsolescence and scrap and include products exceeding the shelf life, i.e., spoils and is no good for use in its original purpose.

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