Figure 21-1
A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average £4,000 per day. A competitor keeps 10 days of inventory on hand, and the competitor's carrying costs average £2,000 per day.
-Refer to Figure 21-1. The value-added costs are
A)£80,000.
B)£40,000.
C)£20,000.
D)£-0-.

Question

Quizplus · Accepted Answer

Value-added costs refer to the costs that add value to a product or service, such as materials, labor, and overhead that contribute directly to the finished product. The carrying costs of inventory, which are costs associated with holding or storing inventory before it is sold, do not add value to the product itself. Therefore, regardless of the difference in inventory levels and carrying costs between the company and its competitor, the value-added costs from carrying inventory are £0 because carrying costs are considered non-value-added costs.

Figure 21-1 A Company Keeps 20 Days of Materials Inventory on Hand