Acquisition Cost

What is an Acquisition Cost?

An acquisition cost, also referred to as the cost of acquisition, is the total cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures, but before sales taxes. An acquisition cost may also entail the amount needed to take over another firm or purchase an existing business unit from another company.

Acquisition cost refers to the all-in cost to purchase an asset. These costs include shipping, sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing. When acquiring property, acquisition costs can include surveying, closing fees, and paying off liens. This amount is considered to be the book value of an asset.

The term can also refer to the cost to acquire a new customer. These costs include marketing materials, commissions, discounts offered, and salesperson visits. This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. In general terms, it helps to decide the worth of the customer to the company.

Understanding Acquisition Costs

Acquisition costs provide a reflection of the true amount paid for fixed assets before sales tax is applied, for expenses related to the acquisition of a new customer, or for the takeover of other firms. Acquisition costs are useful because they recognize a more realistic cost on a company’s financial statements than using other measures. For instance, the acquisition cost of property, plant, and equipment (PP&E) recognizes any discounts or additional costs that the company will experience and is often referred to as the original book value of the asset in question.

Acquisition Costs for Fixed Assets

Besides the price paid for the asset itself, additional costs may also be considered part of acquisition when these costs are directly tied to the acquisition process. For example, if the asset in question requires legal assistance to complete the transaction, legal and regulatory fees are also included. Commissions associated with the purchase may also be included, such as those paid to a real estate agent when dealing with a property transaction, to a staffing company for placing an employee, to a marketing firm for acquiring customers, or to an investment bank for brokering a merger.

With regard to manufacturing or production equipment, any costs associated with bringing the equipment to an operational state may also be included in the cost of acquisition. This includes the cost of shipping & receiving, general installation, mounting, and calibration.

Acquisition Costs for Customers

Customer acquisition costs are those funds that are used to introduce new customers to the company’s products and services in hopes of acquiring the customer’s business. The customer acquisition cost is calculated by dividing total acquisition costs by total new customers over a set period.

Understanding customer acquisition costs is helpful in planning future capital allocations for marketing budgets and sales discounts. Costs traditionally associated with customer acquisition include marketing and advertising, incentives and discounts, the staff associated with those business areas, and other sales staff or contracts with external advertising firms. Incentives may be expressed in various formats, such as buy-one-get-one-free deals, receiving another product free with purchase, upgraded service at no additional cost to the customer, gift cards, or bill credits.

One business sector with a high occurrence of promotions directed at new customers is the wireless and cellular industry. Wireless companies often extend deals to new customers such as increased data packages, additional family phone lines for free, and discounts on the newest cellular phones. The purpose of these offerings is to entice customers to choose their business over their competitors.

Acquisition Cost Principles

If we take a further thorough look at the perception of acquisition cost we may ascertain that even costs incurred in obtaining the legal rights or ownership to an asset are included in its acquisition cost. Legal costs, commission and various fees can be some examples.

Acquisition costs also include those special carrying costs which occur particularly in case of machineries and plant. Any costs incurred to put that particular asset into an operational state will be included in its acquisition costs as well.

In case of complicated equipment even its installation costs; delivery cost, calibration costs, etc. are included in its acquisition costs too. In reaching the accurate acquisition costs of an asset some assumed costs may as well be accounted for. These costs would comprise of discounts received, depreciation, impairment cost, amortization etc.

In strict accounting terms if we please to calculate the acquisition cost, we may do it using this formulation.

AC = (Added direct expenses affecting to acquisition + Buying price) - (Amortization + Impairment costs + Depreciation + Taxes)

Arbitrating by the directly above analysis, we may conclude that an asset’s acquisition cost includes two primary components. The actual price paid for an asset i.e. the invoice price of the asset and also the additional direct costs that put an asset into a working state and gives the owner full ownership rights to it as well.