Meaning and example
Inventory holding costs are the expenses and economic consequences of keeping a resource over time under a specified model: premises, servicing, quality losses and the cost of tied-up capital. The last item is not always a separate accounting payment, so it should be labeled as a model quantity. If average inventory is 200 units and specified holding costs are 3 per unit per year, the illustrative amount is 600. Do not mix an annual rate with average inventory for another period or add again expenses already included in another component.
How to avoid a mistake
For comparing alternatives, focus first on costs that change with the inventory balance. Rent for a warehouse that has already been paid may not fall after a small reduction in the batch; the opportunity cost of capital remains an economic question. Mixing cash payments and modeled losses without explanation makes the total opaque.
For more on the relationship between cost and write-downs: [the educational analysis](/guides/inventory-cost-nrv/).
Sources and review boundaries
Support: **gl-mit-inventory**, **gl-mit-eoq**. The example is editorial. Sources verify the concept, but do not confirm the reliability of anyone’s financial statements or the suitability of a decision for a particular investor.