--- title: "What Is Carrying Cost?" url: https://www.uncap.com/glossary/carrying-cost author: "Denis Dyli" published: 2026-10-28 updated: 2026-10-28 summary: "Carrying cost is the cost of keeping inventory on hand until it is sold or used: the capital tied up in it, storage space and handling, insurance and taxes, and the risk of loss through damage, theft, shrinkage or obsolescence. It can be stated per year as a percentage of average inventory value." --- # What Is Carrying Cost? > Carrying cost is the cost of keeping inventory on hand until it is sold or used: the capital tied up in it, storage space and handling, insurance and taxes, and the risk of loss through damage, theft, shrinkage or obsolescence. It can be stated per year as a percentage of average inventory value. **Carrying cost**: Carrying cost is the cost of keeping inventory on hand until it is sold or used: the capital tied up in it, storage space and handling, insurance and taxes, and the risk of loss through damage, theft, shrinkage or obsolescence. It can be stated per year as a percentage of average inventory value. ## How it works Carrying cost is what a business spends to hold inventory between receipt and sale, on top of what it paid for the goods. It is a plain business measure, not a figure set by a standard, so each business decides which of its costs to count. Common components: - Capital: the money tied up in stock, valued at the interest paid on borrowing or the return the cash could earn elsewhere. - Storage: warehouse space, utilities, racking and the labor to handle stock. - Service: insurance and taxes on the goods held. - Risk: stock lost to damage, theft or shrinkage, and stock that becomes obsolete or expires. The arithmetic: - Average inventory value: (beginning inventory value + ending inventory value) / 2 - Carrying cost rate: annual carrying costs / average inventory value x 100 ## How carrying costs show up in the books Two IRS inventory rules touch the risk component: - Goods that cannot be sold: goods you cannot sell at normal prices because of damage, imperfections, shop wear, changes of style, odd or broken lots, or similar causes are valued at their bona fide selling price minus direct cost of disposition. - Loss of inventory: a casualty or theft loss of inventory can be claimed through the increase in the cost of goods sold, by properly reporting opening and closing inventories, or claimed separately. As of October 28, 2026, these rules come from IRS Publication 538 (revised January 2022). This is general information, not tax or accounting advice. ## Carrying cost vs ordering cost Ordering cost is what it takes to place and receive each order. The two move in opposite directions: larger, less frequent orders lower ordering costs per year but raise average inventory and so raise carrying cost. [Economic order quantity](/glossary/economic-order-quantity) is the order size that balances them, and [safety stock](/glossary/safety-stock) adds to average inventory, and so to carrying cost. ## Example A distributor of plumbing parts averages $400,000 of inventory over the year. Its annual costs of holding that stock: - Capital at 8%: $400,000 x 0.08 = $32,000 - Storage space and handling: $20,000 - Insurance and taxes on inventory: $6,000 - Shrinkage, damage and obsolete stock: $18,000 Total carrying cost is $32,000 + $20,000 + $6,000 + $18,000 = $76,000, a carrying cost rate of $76,000 / $400,000 = 19% a year. A $50 item that sits for three months costs about $50 x 0.19 x 3 / 12 = $2.38 to hold. ## On Shopify Shopify's inventory reports supply the quantities and values a carrying cost estimate starts from: - Month-end inventory value: the cost per item multiplied by the ending quantity for each product variant, with the sum in the Summary row. On hand inventory in this report includes Available, Committed and Unavailable units. - Products by sell-through rate: displays what percentage of your total inventory you've sold during the selected time period. - Inventory remaining per product: gives an overall sense of how long your tracked inventory is estimated to last, based on average sales rates and the inventory left. - ABC product analysis: Shopify notes that if you overstock products that account for only 5% of your revenue (C-grade products), then you can spend more on warehousing costs than necessary. ## How Uncap helps Uncap's guide to [B2B ecommerce pricing strategies](/post/5-effective-b2b-ecommerce-pricing-strategies) lists warehousing and inventory carrying cost in the full cost base for B2B manufacturers and distributors, next to product cost, freight and fulfillment. Its guide to [managing millions of electronics SKUs](/post/managing-millions-electronics-skus) gives a rule of thumb: if a SKU's carrying cost and complexity outweigh its contribution to revenue, it should go. ## Related terms - Dead stock - Inventory turnover ratio - Reorder point - ABC analysis - Periodic inventory ## Sources - IRS Publication 538: Accounting Periods and Methods (Inventories) - Shopify Help Center: Inventory reports ## Frequently asked questions ### How do you calculate carrying costs? To calculate carrying cost, list a year's costs of holding inventory: interest or forgone return on the money tied up, storage space and handling, insurance and taxes on the goods, and losses from damage, shrinkage or obsolescence. Their total is the annual carrying cost in dollars. ### What is the formula for calculating total inventory carrying cost? Add up a year's carrying costs (capital, storage, service and risk), then divide by average inventory value and multiply by 100 to get the carrying cost rate. Average inventory value is beginning plus ending inventory value, divided by 2. ### What is an example of a carrying cost? Warehouse rent is a carrying cost, and so are insurance on stock, interest on the money tied up in it, and the loss when goods expire or become obsolete. A distributor with $400,000 of average inventory and $76,000 of these costs a year has a carrying cost rate of 19%.