What do carrying costs encompass?

Carrying costs refer to the total cost associated with holding and storing inventory over a period of time. This includes expenses such as warehousing, insurance, depreciation, and the opportunity cost of the capital tied up in inventory. Therefore, the identification of carrying costs as encompassing the costs of storing inventory accurately reflects a fundamental concept in inventory management and accounting. Understanding carrying costs is essential for businesses, as it influences inventory management decisions, pricing strategies, and overall operational efficiency.

In contrast, the other options focus on different aspects of inventory management; restrictions on sales relate to control measures rather than costs incurred from holding inventory, the cost of ordering items pertains to replenishing stock rather than maintaining existing inventory, and costs from inventory shortages highlight the drawbacks of low stock levels instead of the ongoing expenses of holding inventory.