The cost to store, hold or carry inventory consists of 1) the cost of the space used including rent, heat, maintenance, etc., 2) the cost of the money tied up in inventory, 3) the cost of insurance and perhaps property tax, and 4) the cost of deterioration and obsolescence of the inventory items.
Some of the storage costs are a function of the cost or value of the inventory, while some storage costs are dependent on the physical size of the items. The costs to store or hold inventory are often stated on an annual basis, such as $3 per unit or 15% of an item's cost.
The calculation of the cost to store inventory should be based on the incremental annual costs or the company's opportunity costs. In other words, if a business has a large amount of cash, no debt, and a warehouse that is half empty, its costs to store inventory will be relatively low. Another company with little cash, much debt, and little available storage space will have relatively high costs of storing inventory.
The costs to store inventory are part of the economic order quantity (EOQ) formula or model that calculates the optimum order quantity. The economic order quantity is the number of units that will minimize the total annual costs of both ordering and storing inventory.