What is Acquisition Cost?-Definition
An acquisition cost is a 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. It is different from the actual invoice value of the goods or services.
Understanding 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. Additionally, an acquisition cost can describe the costs incurred by a business in relation to the efforts involved in acquiring a new customer.
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.
Importance of Acquisition Cost
Acquisition Cost is a key business metric that many businesses and investors look at. In fact, many companies end up failing due to not fully understanding their acquisition cost.
1. Improving return on investment
Understanding the cost to acquire new customers is crucial to analyzing marketing return on investment.
2. Improving profitability and profit margin
Understanding its Acquisition cost provides a business with the ability to fully analyze the value per customer and improve its profit margins.
Key Takeaways
- Acquisition cost refers to an amount paid for fixed assets, for expenses related to the acquisition of a new customer, or for the takeover of a competitor.
- It is useful in identifying the full cost of fixed assets because it includes items such as legal fees and commissions and removes discounts and closing costs.
- Acquisition costs are also useful to determine the full expense incurred in enticing new customers, and it can be used to compare to the revenue new customers generate.
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