Carrying cost is the expense incurred by unproductive assets due to the warehousing of the goods.
The costs associated with holding inventory of unproductive assets include:
• Rent and utilities – These is an operating expense that has to be paid out for renting the space occupied by the goods as well as to keep utilities running. The utilities bill is obviously higher for goods that require more power and water such as perishables that need to be stored in freezers.
• Insurance – The stored assets may need to be insured, especially if they are high value assets such as artwork or jewelry. In these cases, insurance premiums can be quite costly and need to be paid even if they are not to be sold anytime in the near future.
• Taxes – Depending on the type of goods stored, additional taxes may need to be paid.
• Employee costs – The number of employees dedicated to counting the inventory, keeping it safe (security), and moving them around the warehouse and from warehouse to warehouse needs to be factored in. The amount of time clocked in by these employees is proportional to the amount money that needs to be spent to pay their salaries, which is an additional expense.
• Opportunity cost – This refers to the profit you might otherwise be currently making if the money tied up in the inventory was invested somewhere else.
• Damage, shrinkage, and obsolescence – These are factors that will determine the depreciation of the value of the assets currently inventoried.