Multiple Choice
Which of the following statements best describes how the 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
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Which of the following costs is NOT considered an inventory holding (or carrying) cost?
A
Inventory obsolescence costs
B
Cost of ordering inventory
C
Insurance on inventory
D
Warehouse storage costs
Verified step by step guidance1
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 storage costs, insurance, and obsolescence costs.
Review each option provided in the problem: Inventory obsolescence costs, Cost of ordering inventory, Insurance on inventory, and Warehouse storage costs.
Identify which costs are directly related to holding inventory. Inventory obsolescence costs occur when inventory becomes outdated or unsellable, insurance on inventory protects against risks, and warehouse storage costs are incurred to physically store the inventory.
Recognize that the cost of ordering inventory is not a holding cost. Instead, it is classified as an ordering cost, which is incurred during the procurement process, such as administrative expenses or shipping fees.
Conclude that the correct answer is 'Cost of ordering inventory,' as it is not considered an inventory holding (or carrying) cost.
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