Loading the player...

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 Acquisitions

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.

RELATED TERMS
  1. Acquisition

    An acquisition is a corporate action in which one company buys ...
  2. Acquisition Financing

    Acquisition Financing is the capital that is obtained for the ...
  3. Acquisition Adjustment

    An acquisition adjustment pertains to the premium a business ...
  4. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  5. Asset Acquisition Strategy

    An asset acquisition strategy is a means for a company to promote ...
  6. Operating Cost

    Operating costs are expenses associated with the maintenance ...
Related Articles
  1. Small Business

    What Merger and Acquisition (M&A) Firms Do

    For a business planning to make a deal, it can be intimidating. This is why merger and acquisition firms step in to lead the buying and selling process.
  2. Investing

    The Five Biggest Acquisitions in History

    Here's a list of the top acquisitions in the history of global corporations.
  3. Investing

    Bank Of America Sets Strategy

    Bank of America held an analyst meeting and touted the bank's brand, distribution network and product offerings.
  4. Insurance

    The Dreaded DAC Charge Hits Life Insurers

    Deferred acquisition costs will begin to infect life insurer balance sheets. Learn who's in line to feel the pain.
  5. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  6. Insights

    3 Of History’s Largest Acquisitions

    The largest acquisition of 2011 was barely one-sixth the size of the largest from a dozen years ago. Find out what they were.
  7. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
RELATED FAQS
  1. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  2. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  3. How do I evaluate whether a company is a good acquisition candidate?

    Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation, and financial statements. Read Answer >>
  4. How company stocks move during an acquisition

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  5. What is property, plant, and equipment?

    Property, plant, and equipment are physical or tangible assets that are long-term assets that typically have a life of more ... Read Answer >>
Trading Center