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Holding cost

Holding cost is the relevant cost of keeping inventory over time, including applicable storage, insurance, deterioration and finance or opportunity cost of tied-up resources. In a simple EOQ model with instantaneous replenishment and constant usage, average cycle inventory is half the order quantity. Add any separately maintained buffer inventory and apply the annual holding cost per unit. Avoid adding unchanged fixed warehouse costs unless relevant to the decision.

Worked example

Order quantity is 800 units and buffer stock 100, giving average inventory 500. At $3 annual holding cost per unit, annual holding cost is $1,500.

Common mistake

Match the time basis: a monthly carrying rate cannot be combined directly with annual demand without conversion.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027