Acquisition cost is a managerial concept that deals with managerial accounting. It is defined as the net price in addition to other related costs that are necessary to purchase an item.
This includes every cost that has incurred while purchasing a product, assets, or services. The other costs include several others like installation, preparation, and transportation costs.
The acquisition cost does not include operational costs like system integration and training costs. Acquisition cost is also known as asset book value and book value, and it appears in the balance sheet under fixed assets.
Meaning of acquisition cost
It is also known as the cost of acquisition and applies to the acquisition of fixed assets that the company uses for commercial and business purposes. It is the total cost after adjusting closing costs, incentives, discounts, and other related expenses.
It is also the cost that an organization shows and recognizes in its books for equipment, machinery, or property before writing the sales tax.
The acquisition cost includes the amount that is needed for a takeover of another business entity and is also described as cost accumulated by a business entity for acquiring new customers.
Understanding of Acquisition cost with examples
By now, you must have understood that acquisition cost gives us an idea about the amount for the fixed assets before the application of sales tax.
These types of costs are useful because they recognize additional costs and discounts that are tied to the acquisition process as a realistic cost on the financial statement of a company.
For instance, a company has purchased an asset, and it requires legal assistance for conducting the said transaction, then the legal and regulatory fees is the additional cost and will be included in the acquisition cost.
If you have paid a commission for the purchase, it is also included in the cost of acquisition.
The commission includes the amount paid to a real estate agent for buying the asset or property, to a marketing company for acquiring customers or to an investment bank for the merger.
Other inclusions are customs fees, closing fees, surveying fees, cost incurred during site preparation, testing and installation, sales tax, and shipping costs.
The cost incurred to bring a production or manufacturing equipment to its operational state is also included as the acquisition cost. Other such costs that are part of the cost of acquisition are general installation, shipping and receiving, and mounting and calibration.
Cost of acquisition also includes the expenses occurred in attaining a sale or a customer. A customer acquisition cost is an amount that is spent to acquire new customers for the company and is calculated by dividing the cost of acquisition by total new customers at a particular set period.
The amount in case of customer acquisition cost includes salesperson visits, discounts, incentives and commissions, and marketing materials.
The acquisition cost is also tied with sales and marketing campaigns in business sales as good campaigns will lead to better sales figures and customer retention.
Thus the acquisition cost will be considerably lower. Conversely, the cost will be higher in sales and marketing campaigns of high budgets as important criteria at this point will be the number of new customers that the company has been able to draw in its fold.
As acquisition cost is high in such cases, the organizations work more towards retaining customers as the acquisition cost in those circumstances is considerably lower.
Suppose ABC Company has spent twenty lakh of rupees in its marketing campaign and meanwhile has offered its regular customers discounts on several products.
The chances are that the company will profit more from the incentive than the marketing because most of its older customers have maintained brand loyalty and purchased products and services from the company compared to the number of new customers.
Acquisition cost includes the factors that increase the cost as well as decrease the cost. For example, XYZ Company has purchased an asset for ten thousand dollars with a stipulation that if the company pays within fifteen says it can avail itself a discount of 4%.
The total cost of acquisition includes both discounts and incentives. Similarly, the acquisition cost also includes additional cost and if you have paid one thousand dollars for setting up that asset then both the original cost and the setting up cost will be included in the acquisition cost.
The formula
Acquisition cost determines the actual expense of an asset, and it can be calculated with the help of the following formula-
Acquisition cost = (purchase price + additional direct expenses relative to acquisition) – (Depreciation + amortization + taxes + impairment costs)
Suppose PT Company has purchased machinery worth 20,000 dollars and the shipping and installation cost are 500 dollars and 1000 dollars respectively. The depreciation is estimated at 800 dollars for every year. Keeping the value in mind the acquisition cost of the machinery will be
Acquisition cost = (purchase price + additional direct expenses relative to acquisition) – (Depreciation + amortization + taxes + impairment costs)
Acquisition cost = (purchase price + shipping cost a+ installation cost) – (Depreciation)
Acquisition cost = (20,000 + 500 + 1000) – (800)
Acquisition cost = 21,500 – 800
Acquisition cost = 20700 dollars
The acquisition cost of the asset, in this case, is 20,700 dollars.
