Certified Management Accountant Practice Exam

The calculation of carrying costs of inventory significantly impacts the cost of goods sold (COGS) because it relates directly to the expenses associated with storing and managing inventory. Carrying costs include costs such as warehousing, insurance, spoilage, obsolescence, and the opportunity cost of the capital tied up in inventory.

Higher carrying costs can lead to a higher COGS when businesses adjust how they value their inventory. If carrying costs increase, this might prompt a company to reduce inventory levels or alter pricing strategies, both of which directly influence how COGS is computed. A company might utilize a method for inventory valuation, like FIFO or LIFO, which could also be affected by these carrying costs. Therefore, the calculated carrying costs of inventory are integral to determining how much it truly costs a company to sell its products during a specific period.