The specific cost of carrying a specific product or group of products in inventory is calculating by totaling the five components:

* Insurance, Taxes, and Opportunity Cost: Multiply the ITO factor (calculated above) by the average inventory investment of the item or group of items.

* Shrinkage Cost: Multiply the calculated shrinkage factor by the average inventory investment. If history is any indication, this portion of the average inventory value will eventually be lost, stolen, misplaced, or broken.

* Obsolescence Cost: Multiply the calculated obsolescence factor by the average inventory investment. Again, if history is any indication, this portion of the average inventory value will eventually be classified as obsolete inventory.

* Cost of Counting: Add the annual cost of counting the item.

* Cost of Rent, Utilities, and Moving Material: Add the calculated annual cost that was based on the cubic volume of space required to store the item.

Divide the sum by the average inventory investment for the item to determine the product's specific carrying cost percentage.

Is this a lot of work? Of course. But if significantly different amounts of effort are necessary to maintain individual inventory items in your facility, the exercise may be worthwhile. Remember that the cost of carrying inventory is one of the keys to effective inventory management, and that accurate information usually leads to outstanding results!

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## 2 comments:

Can someone calculate inventory carrying cost for me with the given numbers please? I'm really stacked on this... thank you.

Opportunity cost of capital 30%

Hurdle rate 15%

Corporate tax 50%

Finished goods inventory 26000000

Variable manufactured cost 70%

Transport costs 1500000

Variable labour cost 300000

Insurance 250000

Storage 450000

Expected obsolence cost 90000

Theft cost 10000

Transport for removing obsolence 50000

Try this site. It takes the same concepts above into consideration, but does the calculation for you.

http://www.pmicp.com/calculators/carryingcost.html

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