The cost incurred for maintaining a given level of inventory are called carrying costs. They includes storage ,insurance, taxes, deterioration and obsolesce.
What is carrying costs?
The cost incurred for maintaining a given level of inventory are called carrying cost. Further, storage costs comprise the costs of storage space (warehousing costs), storage handling costs and clerical and administrative costs. These costs are incurred in recording and providing special facilities such as fencing ,lines , racks etc.
However, this vary with inventory size. This behavior is contrary to that of ordering costs which decline with an increase in inventory size.
The economic size of inventory would thus depend on trade-off between carrying costs and ordering cost.
Ordering and carrying cost
| Ordering costs | Carrying costs |
| Requisitioning | Warehousing |
| Order placing | Handling |
| Transportation | Clerical and staff |
| Receiving, inspecting and storing | Insurance |
| Clerical and staff | Deterioration and obsolescence |
The optimum inventory size is commonly referred to as economic order quantity. It is that order size at which annual total costs of ordering and holding are the minimum. We can follow three approaches :
- the trial and error
- the formula approach
- and the graphic approach
Refer: https://taxandfinanceguide.com/sunk-costs/ and https://taxandfinanceguide.com/what-is-inventory/
