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. Additionally, an acquisition cost can describe the costs accrued by a business in relation to the efforts involved in acquiring a new customer.
BREAKING DOWN Acquisition Cost
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 book value of the asset in question.
Qualifying Acquisition Costs for Fixed Assets
Aside from the price paid of 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 an applicable cost of acquisition. 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.
Customer acquisition costs are those funds that are used in order 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 assist in planning future capital allocations for marketing budgets and sales discounts. Costs traditionally associated with customer acquisition include marketing and advertising, incentives and discounts, and the staff associated with those business areas, along with 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. For example, in 2014, AT&T offered wireless subscribers double the amount of data traditionally offered with its plans at no additional cost to the consumer. This provided potential new customers an incentive to consider signing up for service with AT&T over other wireless carriers, but was recorded as an acquisition cost because the company was not able to book revenues that it would otherwise count on.