First of all, it is generally best to think of holding costs in terms of their annual costs. To do this, you will need accurate representations of your annual inventory levels. My previous article, Average Inventory Levels, details this step by step. Personally, I suggest tracking inventory month by month and using these values to find the average holding cost as opposed to taking the year's beginning, the year's end and averaging the two.
So now you have your average inventory. This needs to be performed for finished goods, work in process, and raw materials inventory.
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