Certified Management Accountant 2026 – 400 Free Practice Questions to Pass the Exam

The correct approach to determining the cost of safety stock involves an assessment of both the carrying cost of the stock and the expected stockout cost.

Carrying costs are the expenses associated with holding inventory, including storage, insurance, depreciation, and opportunity costs. These costs continue to accrue as long as the safety stock is maintained. On the other hand, stockout costs represent the potential loss of sales, customer dissatisfaction, and other adverse effects that occur when demand exceeds supply and inventory is not available.

By combining these two components—the carrying costs and the expected stockout costs—one can arrive at a comprehensive view of the total cost associated with maintaining safety stock. This dual analysis provides a more complete picture that helps businesses make informed decisions about inventory levels, optimizing both inventory holding and customer satisfaction without incurring excessive costs.

Other options focus on only one aspect of the cost or a simple calculation without considering the broader implications of both holding and stockout costs, which is why they do not capture the full picture necessary for effective inventory management.