These are the cost incurred to store the inventory into the warehouse or store rooms. This means that it covers all the depreciation expense of the machines and fixed assets used for keeping the inventory. It also involves the cost of freezing the inventories if the inventory is of perishable nature and freezing in necessary to preserve the products. Apart from this rent of the premises and the salaries of the security guards are also included in the carrying cost of the inventories.
Example
Due to the nature of the products, special type of machinery is used to stock the goods. The annual depreciation charged over this machinery is $2,000/-. There is a premise taken on rent for stocking the inventory as well which costs $25,000 annually. The electricity consumed to light off the area of the premise and machinery is $5,000/- annually. Calculate the carrying cost.
Solution Answer
Holding cost = Depreciation + rent expenses + electricity expense = 2,000+25,000+5,000 = $32,000/-