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ACCA Applied Knowledge · Business and Technology · The relationship between accounting and other business functions

A company's logistics director proposes holding much higher finished goods inventory to avoid stock-outs and improve customer service. Which concern would the finance function most appropriately raise?

Finance would raise the effect on working capital, holding costs and obsolescence risk. Extra finished goods inventory ties up cash and increases storage, insurance and handling costs, and unsold stock may become obsolete, so these costs must be weighed against better customer service.

  1. AThe impact on working capital, holding costs and the risk of obsolescenceCorrect
  2. BThe need to reduce the number of customers served
  3. CThe effect on the company's choice of accounting standards
  4. DThe requirement to change the company's legal structure

Explanation

Higher inventory ties up cash, increases storage, insurance and handling costs, and raises the risk of obsolescence or damage. Finance should weigh these against the service benefit. The other options are unrelated to the proposal.

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