What are the Carrying Costs?
Carrying costs are remunerations a seller is required to pay for holding inventory, processing, and disbursing it. It includes storage fees, appropriate taxes, opportunity costs, insurance, and employee costs. Carrying costs are calculated on the gross volume of products, and they express a certain percentage of a product’s value. These costs hover between 15% to 30% of the product’s value.
Significance of Carrying Costs in an E-commerce Shipping and Delivery
Carrying costs allow sellers to create well-informed decisions and control their profitability. Furthermore, a company can clear all dues through a single payment.
- Estimation: Carrying costs vary between 15% to 30% of a product’s determined value. It allows a company to deduct a storage tenure before they start losing profits. Pre-estimating the carrying costs can also enable a company to reduce inventory holding costs and increase profit margins.
- Single payment for multiple services: Taxes, insurance costs, and warehouse holding fees are some charges that fall under carrying costs. A seller or a company can negate the requirement of making individual payments for each listed service by making a single payment for the total carrying costs.
Prerequisites of Carrying Costs and How It Works
The essential components used to compute a carrying cost have been listed below.
- Capital cost: It is the money invested in manufacturing the product.
- Risk cost: A pre-determined cost for errors such as inventory shrinkage, theft, and product misplacement.
- Volume: Cost of renting out a space. It is calculated per the gross volume.
- Additional costs: Insurance, taxes, handling, and opportunity charges fall under this category.
The formula for calculating carrying costs has been provided below.
Carrying cost(%): Inventory holding sum/ Inventory value X 100.
Payable carrying cost: Value of product X carrying cost(%)
Use Case with Carrying Costs
A seller received an order to ship a car from Phuket to Pattaya. The car’s value was ฿889,000, and the subsequent inventory cost amounted to ฿133,350. Therefore, the carrying cost was computed to be 20% of the total car value, and it was added to the buyer’s final bill and shipped accordingly.