It is the largest component of the total cost of carrying inventory. It includes everything related to the investment, the interests on working capital, and the opportunity cost of the money invested in the inventory.
Cost estimating, The art and the science
Cost estimating is a well-formulated prediction of the probable construction cost for a specific building project. A cost estimate can be an important management tool for planners during the design phase of a project; providing information about the facility and the project budget.
Number and timing
The number of cost estimates required will be project/owner specific. It will generally be linked to the various design phases of the project.
Typically, capital costs tend to be vastly underestimated by inventory buyers. A common mistake to avoid is to reduce them to short-term borrowing rates since rates can fluctuate over time and hurt profitability.