There are four main components to the carrying cost of inventory for a business: capital cost, storage space cost, inventory service cost, and inventory risk cost. Capital cost is the largest component and represents the cost of funds tied up in maintaining inventory levels. Storage space cost includes expenses like rent, utilities, and materials handling. Inventory service cost includes insurance and taxes paid on stored goods. Inventory risk cost accounts for the potential for items to become obsolete, be damaged, or face theft while held as inventory. Proper inventory management and control seeks to minimize these carrying costs.

1. COST ASSOCIATED WITH
INVENTORY
DR ANURAG KUMAR
ASSOCIATE PROFESSOR
DEPARMENT OF BUSIINESS ADMINISTRATION
ABES ENGINEERING COLLEGE GHAZIABAD
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD
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2. COST ASSOCIATED WITH INVENTORY
The cost of carrying inventory is used to help companies determine how much
profit can be made on current inventory. The cost is what a business will incur
over a certain period of time, to hold and store its inventory. The carrying cost of
inventory is often described as a percentage of the inventory value.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD 1

3. COST ASSOCIATED WITH INVENTORY
 There are four main components to the carrying cost of inventory:
A.Capital cost
B. Storage space cost
c.Inventory service cost
D. Inventory risk cost
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD

4. COST ASSOCIATED WITH INVENTORY
Capital cost is the cost that a business expands on carrying
inventory. It is the largest component of the total costs of
carrying inventory.
A company will express the capital cost as a percentage of
the value of the total inventory it is holding.
For example, if a company says that the capital cost is 35
percent of its total inventory costs, and the total inventory
held is 6000, then the capital cost is 2100.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD

5.  Storage Space Cost
 The storage space cost is a combination of the
warehouse rent or mortgage, lighting, heating, air
conditioning, plus the handling costs of moving the
materials in and out of the warehouse.
 Some of the costs are fixed, such as rent or mortgage,
but there are variable costs, such as the handling of the
materials that will vary with the level of inventory.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD 16-5

6. Inventory Service Cost
 The cost of carrying inventory will include inventory
service costs. These costs include insurance paid on the
inventory and taxes to local government.
 The insurance that a company pays is dependent on the
type of goods in the warehouse as well as the level of
inventory. The higher the level of inventory in the
warehouse, the higher the insurance premium will be.
 Many local authorities tax the level of inventory in the
warehouse, so higher levels of inventory will lead to
higher taxes paid and a higher inventory service cost.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD 16-6

7.  Inventory Risk Cost
 Carrying inventory comes with a certain degree of risk. This risk is a
component of the cost of carrying inventory.
 When a company stocks items in the warehouse there is always the risk that
the items may fall in real value during the period they are stored.
 For example, an item could become obsolete or superseded by a new model
or version.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD

8. Types of Inventory Risk
 There are several types of inventory risk, and the better a
company is able to control each of the risks, the better it will
be able to save on all-around costs. The most successful
companies have found methods of controlling all types of
inventory risks.
 Here are inventor risk types:
 Shelf Life – There is a certain shelf life amount for most
products. For the company selling the goods, this is an
inventory risk. Items that are perishable such as eggs and milk
have less shelf life than other product types. The companies
that produce goods such as this one may have higher inventory
risks.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD

9.  Inventory Loss – To every firm, the inventory is a current asset. When the
inventory goes through a loss, there is reduced equity for the company. In
the inventory, goods can get lost with improper management of the
inventory or if employees do not handle inventory carefully. These days,
firms have created a control system for inventory to identify the exact
inventory loss amounts as well as the causes of each loss. This enables
them to prevent such losses of inventory to occur in the future and
reduces expenses of the company.
 Inventory Damage and Loss – Usually, inventories used in normal
processes of business tend to get damaged. Inventory that is damaged
goes to waste as it cannot be used. This increases business cost. To reduce waste
cost and to avoid damaged inventory, inventory control policies are created by
companies. Effective use of inventory also needs to be regulated by rules to
prevent further waste.
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD

10.  Lifecycle – There is a product life cycle that each product goes
through. There is a higher inventory risk for products that are at the
decline stage. Products from firms such as this tend to tighten the
manufacturing policies and inventory control. They only produce
enough to meet the current demand sufficiently. A production surplus
of goods not sold in the marketplace becomes obsolete and for the
firm, this becomes a heavy burden.
 Theft – When it comes to inventory control, theft is one of the biggest
risks. This is particularly true when there is higher value in inventory.
If theft is something that internal employees are involved in, it is
harder to be able to identify where the theft happens since these
employees are more familiar with the system in its entirety
DR ANURAG KUMAR ASSOCIATE PROFESSOR ABES ENGINEERING COLLEGE GHAZIABAD