What is an acquisition cost?
Acquisition cost, also called acquisition cost, is the total cost that a business recognizes in its books for property, plant and equipment after adjusting for discounts, incentives, closing costs and other necessary expenses, but before sales taxes. An acquisition cost can also involve the amount necessary to take over another business or buy an existing business unit from another business. In addition, an acquisition cost can describe the costs incurred by a company in relation to the efforts involved in acquiring a new client.
Key points to remember
- The acquisition cost refers to an amount paid for fixed assets, for expenses related to the acquisition of a new client or the acquisition of a competitor.
- It is useful for identifying the total cost of fixed assets as it includes items such as legal fees and commissions and removes discounts and closing costs.
- Acquisition costs are also useful in determining the total cost of attracting new customers, and they can be used to compare the revenue that new customers generate.
Understanding acquisition costs
Acquisition costs reflect the actual amount paid for capital assets before the application of sales tax, for expenses related to the acquisition of a new customer or the acquisition of other businesses. Acquisition costs are useful because they recognize a more realistic cost on a company’s financial statements than the use of other measures. For example, the cost of acquiring tangible capital assets (PP&E) recognizes the discounts or additional costs that the business will incur and is often called the original book value of the asset in question.
Capital acquisition costs
In addition to the price paid for the asset itself, additional costs can also be considered as part of the acquisition when these costs are directly linked 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 can also be included, such as those paid to a real estate agent during a real estate transaction, to a recruitment company for the placement of an employee, to a marketing company for the acquisition of clients or an investment bank for brokerage. a merger.
For manufacturing or production equipment, all costs associated with getting the equipment up and running can also be included in the acquisition cost. This includes shipping and receiving costs, general installation, mounting and calibration.
Acquisition costs for customers
Customer acquisition costs are the funds that are used to introduce new customers to the company’s products and services in the hopes of acquiring the customer’s business. The customer acquisition cost is calculated by dividing the total acquisition costs by the total of new customers over a given period.
Understanding customer acquisition costs is useful for planning future capital allocations for marketing budgets and sales discounts. The costs traditionally associated with acquiring customers include marketing and advertising, incentives and discounts, personnel associated with these areas of business and other sales personnel, or contracts with external advertising agencies. Incentives can be expressed in a variety of formats, such as one-time purchase offers, another free product with purchase, improved service at no additional cost to the customer, gift cards, or invoice credits.
The wireless and cellular industry is a commercial sector where promotions are aimed at new customers. Wireless carriers often offer new contracts to new customers, including increased data plans, free additional family phone lines, and discounts on newer mobile phones. The purpose of these offers is to encourage customers to choose their company rather than their competitors.