When trying to understand the true cost of inventory, accountants calculate the cumulative cost of simply having that inventory stored for the intent of having it ready for sale when needed. This cost includes the amounts charged or paid for storage, taxes, insurance, damage, theft, handling, investments and other miscellaneous costs.
(1) storage: amounts for monthly rent
(3) insurance: premiums paid for inventory
(4) damage: unsellable or obsolete
(6) Handling: labor and equipment for distribution
(8) Other: opportunity costs (avg. value * rate receivable elsewhere)
After calculating one lump sum, divide that by the average cost of inventory on stock.