Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

Calculating the carrying cost of inventory involves understanding various components that contribute to the overall cost of holding inventory over a given period. The correct approach involves taking the per item carrying cost, which encompasses expenses such as storage, insurance, depreciation, and opportunity costs of the funds tied up in inventory.

The correct option outlines a formula that correctly incorporates both the per item carrying cost and the inventory levels. Specifically, it takes the per item carrying cost and multiplies it by the carrying cost percentage to derive the cost associated with holding that individual item. Additionally, it accounts for average inventory levels by considering half of the ordering cost, thereby reflecting the typical inventory held.

This method provides a comprehensive view of carrying costs by including both direct carrying costs associated with each unit of inventory and indirect costs related to the volume of inventory that a company typically maintains. This approach is critical for effective inventory management and ensures that businesses can accurately assess the financial implications of their inventory policies.

The other options do not appropriately calculate the carrying cost. For example, simply adding per item carrying costs without accounting for average inventory levels misses a crucial aspect of carrying costs. Thus, focusing on the factors included in option C gives a precise method for assessing carrying costs.