Multiple Choice
Which of the following statements best describes how Cost of Goods Sold (COGS) is determined under the perpetual inventory system compared to the periodic inventory system?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following costs is NOT considered an inventory holding (or carrying) cost?
A
Inventory obsolescence costs
B
Cost of ordering inventory
C
Warehouse storage costs
D
Insurance on inventory
Verified step by step guidance1
Step 1: Understand the concept of inventory holding (or carrying) costs. These are costs incurred to store and maintain inventory, ensuring it is available for use or sale. Examples include warehouse storage costs, insurance on inventory, and inventory obsolescence costs.
Step 2: Analyze each option provided in the question to determine whether it fits the definition of inventory holding costs. For example, warehouse storage costs are directly related to storing inventory, and insurance on inventory protects against risks like theft or damage.
Step 3: Consider inventory obsolescence costs. These occur when inventory becomes outdated or unsellable, which is a risk associated with holding inventory over time.
Step 4: Evaluate the cost of ordering inventory. This cost is associated with the procurement process, such as administrative expenses or shipping fees, and is not related to holding or maintaining inventory.
Step 5: Conclude that the cost of ordering inventory is NOT considered an inventory holding cost, as it pertains to acquiring inventory rather than storing or maintaining it.
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