ACCA Financial Management (F9) Certification Practice Exam

Calculating the average annual cost of safety inventory involves which components?

1. Quantity of safety inventory and average usage

2. Quantity of safety inventory and inventory holding cost per unit per annum

3. Error rate and inventory turnover

4. Average sales and cost of goods sold

The correct answer is: Quantity of safety inventory and inventory holding cost per unit per annum

The average annual cost of safety inventory is calculated by considering both the quantity of safety inventory held and the associated inventory holding cost per unit per annum. Safety inventory is held to guard against variability in demand or supply, and its cost includes expenses related to maintaining that inventory. When determining the average annual cost, the quantity of safety inventory directly influences the total cost since higher stock levels result in greater holding costs. Additionally, the inventory holding cost per unit per annum is crucial because it accounts for the expenses necessary to store, insure, and manage the inventory, making it a vital component in the calculation. Therefore, multiplying the quantity of safety inventory by the holding cost per unit provides a clear understanding of the financial implications of maintaining that safety stock on an annual basis. In contrast, the other options do not accurately reflect the components necessary for calculating the average annual cost of safety inventory or focus on different inventory management concepts.