Certified Management Accountant Practice Exam

The calculation of the cost of carrying average inventory involves understanding the various components that contribute to this expense over time. The correct answer includes the concept of the average inventory held, which is calculated based on the total inventory received and the amount sold or used over a specific period.

When looking at the average cost of carrying inventory, it can be quantified as follows: the average inventory, often expressed as (per order/2), represents the stock held on average between reorder points, while the per item carrying cost indicates how much it costs to hold one unit of inventory. This carrying cost typically includes costs related to storage, insurance, deterioration, and opportunity cost of the capital tied up in inventory. Additionally, factoring in the cost of safety stock—extra inventory held to mitigate the risk of stockouts—provides a comprehensive view of carrying costs.

Ultimately, the combination of these elements represents a full accounting of the costs associated with maintaining average inventory levels, making this choice the most accurate reflection of the components involved in carrying costs.