Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

What type of costs include expenses associated with maintaining inventory over time?

1. Procurement Costs

2. Holding/Carrying Costs

3. Logistical Costs

4. Depreciation Costs

The correct answer is: Holding/Carrying Costs

Holding or carrying costs refer to the expenses that a business incurs for storing and maintaining inventory over time. These costs can encompass various components, including warehousing expenses, insurance, spoilage or obsolescence of products, and opportunity costs associated with the capital tied up in inventory. Understanding these costs is vital for effective inventory management, as they can significantly impact a company's profitability. By analyzing holding costs, businesses can make informed decisions about how much inventory to keep on hand, which can help optimize storage space and reduce waste. In contrast, procurement costs pertain to the expenses directly tied to acquiring goods, logistical costs involve expenses related to transporting and delivering inventory, and depreciation costs focus on the reduction in the value of assets over time, which is not specifically tied to the act of maintaining inventory.