How are acquisition and holding costs tested in CIPS exams?

07/07/2025 jessica Comments 0 Comment

Through our statistics, CIPS typically includes 5–6 exam questions on types of inventory costs. Many students confuse these two types of costs, and they may lose marks on such questions because they cannot accurately identify the elements of acquisition costs and holding costs.

Acquisition costs refer to the total expenses incurred when purchasing goods or services. These costs cover all activities from identifying the need to making the payment to the supplier. This means that acquisition costs include more than just the purchase price; they also encompass additional expenses. Beyond the payment to the supplier, the buying organization must invest time and effort to manage the purchase. For instance, they need to hire procurement professionals and invest in management software to carry out these tasks. Exam questions on this topic are not particularly difficult, and it’s easy to score points if you understand the basic concepts.

Example 1: Which of the following are the acquisition cost of inventory?

The expediting and invoice processing costs
The rent and insurance of the building
The cost of product redundancy and obsolescence
The cost of receiving the product and conducting quality inspections
a. 2 and 3 only
b. 2 and 4 only
c. 1 and 4 only
d. 1 and 3 only

In the example, CIPS provides four options, each representing a type of cost. You are required to identify which costs belong to acquisition costs. It is clear that Option 1 and Option 4 are relevant.

When the supplier sends the invoice, the buyer needs to compare the information on the invoice with the order receipt to verify its accuracy. Once the invoices are confirmed to be correct, the buying organization will process them within the given timeframe. Therefore, Option 1 is correct.

When the order arrives at the buyer’s premises, inventory staff members need to unload and inspect the cargo. They must check whether the cargo meets the required specifications. If the order does not meet their requirements, they notify all involved parties and return the goods. That’s why Option 4 is accurate.

Holding costs are associated with the cost of storage and physical handling. There are many sub-costs related to holding costs, so CIPS categorizes them into two main types:

Costs related to the value of goods

Some students thought that they are the purchase price, but they are mistaken. The costs include:

Losses: The buying organization may incur costs related to product deterioration, obsolescence, inventory redundancy, or theft.

Financial costs: The buying organization may borrow money from a bank to purchase the goods, potentially incurring interest charges.

Insurance costs: The buying organization often purchases insurance for its high-value inventory. The higher the value of the product, the higher the insurance premium.

Costs related physical characteristic of the inventory

Companies often spend a lot of money on inventory management. The costs include:

• Storage space: The company needs to build its own warehouse or rent one to store products. Additionally, they must purchase IT systems to manage inventory and hire a third party to maintain the warehouse.

• Utility costs: Warehouses require electricity for lighting, heating, and cooling.

• Equipment and labor: The buying organization needs to purchase or rent warehouse equipment and hire labor to move inventory in and out of the warehouse.

• Administrative costs: Upon receiving the products, the buying organization must label them with barcodes or SKUs to streamline tracking and storage. For new products, they also need to update the inventory management software database. Additionally, documentation related to goods received and dispatched must be recorded.

Example 2: “In addition to interest costs on capital tied up in inventory, as well as losses from deterioration and obsolescence, there are several other holding costs. Which of the following can be classified as holding costs? Select TWO that apply
A. Production costs
B. Costs of idle time
C. Storage costs
D. Selling costs
E. Administrative costs

The exam question requires you to identify the different types of holding costs. It’s quite simple! We can easily select the correct options, which are C and E. The other options are not related to inventory.

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