Cost prices appear in several forms, such as actual cost, last cost, average cost, and net realizable value.
Cost price Cost price is also known as CP. cost price is the original price of an item. The cost is the total outlay required to produce a product or carry out a service. Cost price is used in establishing profitability in the following ways: • Selling price (excluding tax) less cost results in the
profit in
money terms. • Profit /
selling price (excluding tax) when expressed as a percentage produces (
gross profit) or GP%. •
Expense /
net sales yields a percentage that when used as the target margin will produce
gross profit.
Actual or landed cost In calculating actual or landed cost, all expenses incurred in acquiring an item are added to the cost of items in order to establish what the goods actually cost. Additions usually include freight, insurance costs, import duties and other charges which arise between manufacturer and retailer.
Last cost This is the actual
value of the item when last
purchased, normally expressed in units.
Average cost When new
stock is combined with old stock, the new
price often
overstates the value of stock holding. The better method is to combine the total value of
investment in stock, old and new, and divide by the total number of units to calculate the average cost. This is a very accurate method of establishing
stock holding.
Moving average cost Moving average cost (MAC) is a slight
permutation of the above, with the
average being calculated from the previous average and new price.
Net realizable value The net realizable value normally indicates the average value of an item in the
marketplace. Often this cost is interchangeable with
replacement cost. ==References==