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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

Which of the following best describes 'carrying cost' in the context of inventory management?

Carrying cost is the cost of holding inventory, including storage, insurance, obsolescence, pilferage and the opportunity cost of funds tied up in stock. It differs from ordering cost, which relates to placing orders, and from stock-out cost, which arises when stock is unavailable.

  1. ACost of placing and processing a purchase order with a supplier
  2. BCost of storage, insurance, obsolescence and the funds locked up in holding inventoryCorrect
  3. CLoss of sales and customer goodwill because stock is not available
  4. DCost of transporting goods from the supplier to the factory

Explanation

Carrying costs are the costs of holding stock: storage, insurance, pilferage, obsolescence and the interest on funds blocked in inventory. Option A describes ordering cost and option C describes stock-out cost. Transport of purchases is usually part of the purchase cost or ordering cost, not carrying cost.

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