Holding cost is classified as which type of cost in accounting?

• A. Fixed cost
• B. Opportunity cost
• C. Carrying cost
• D. Variable cost

Answer: (C)

Verified step by step guidance

1. Understand the concept of holding cost: Holding cost, also known as carrying cost, refers to the expenses incurred for storing and maintaining inventory over a period of time. These costs typically include storage fees, insurance, depreciation, and obsolescence.
2. Classify the types of costs in accounting: Fixed costs remain constant regardless of production levels, variable costs change with production levels, and opportunity costs represent the potential benefits lost when choosing one alternative over another.
3. Recognize that holding cost is not a fixed cost: Holding costs vary depending on the amount of inventory being stored, making them unsuitable to be classified as fixed costs.
4. Understand why holding cost is not an opportunity cost: Opportunity cost is a theoretical cost representing the value of the next best alternative foregone, which is different from the tangible expenses associated with holding inventory.
5. Conclude that holding cost is classified as carrying cost: Carrying cost is the correct classification for holding cost, as it directly represents the expenses related to storing and maintaining inventory.