Inventory holding cost
Inventory holding cost is the cost of carrying stock — storage, insurance, obsolescence and the capital tied up — usually expressed per unit per year and traded off against ordering costs in the EOQ model.
FrameworkEOQ model
See it move
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An item costing €20 has a holding cost of 20% of cost, €4 per unit per year. Ordering in batches of 800 units means average inventory over the cycle is half the batch, 800 ÷ 2 = 400 units, so total annual holding cost is 400 × €4 = €1,600.
Where it fits
SubjectCost AccountingCoreTopicRelevant Costs & Decision-MakingCoreTopicStrategic & Lean Cost ManagementCore
The formula
LaTeX
Variables
- Total annual holding cost (€)
- Order quantity (units)
- Holding cost per unit per year (€)
Values the cost of the average inventory carried between orders under the EOQ model.
Check yourself
PracticeCORE
A firm holds an item costing €50 per unit, with holding cost estimated at 12% of unit cost per year. It orders in batches of 1,200 units. What is the total annual inventory holding cost?
Select an answer to check your understanding.