Cost Plus Method
Cost Plus Method
The Cost Plus Method is a Transfer Pricing Method. The Cost Plus Method calculates transfer prices by adding a markup to the cost of goods procured. It looks at the gross costs of an intercompany transaction. An appropriate markup—in line with market conditions and performed functions—is added to the gross cost price. The total price should give, for example a manufacturer, an adequate gross margin to cover further operational expenses and leave a fair margin.
By calculating the gross costs and adding an appropriate markup, the Cost Plus Method ensures that the transfer price reflects both costs and a fair profit margin.
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Get in touchHow the Cost Plus Method works
Starting with the procurement cost, a percentage is added to cover OPEX and ensure profitability for the entity procuring goods. The Cost Plus Method can be suitable for transactions involving procurement.
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Cost Plus Method vs TNMM
The Cost Plus Method is often confused with the Transactional Net Margin Method (TNMM) with a Net Cost Plus Margin as the Profit Level Indicator.
However, the Cost Plus Method applies a gross mark-up to, for example, costs of goods procured, while TNMM with the Net Cost Plus Margin evaluates profitability at the EBIT level on a net margin. The Operational Expenses are as such also considered for the TNMM and not for the Cost Plus Method.
Cost Plus Method - P&L placement
The Cost Plus Method focuses on the cost of goods sold (COGS), ensuring that the markup appropriately reflects the procuring entity’s function and risk profile.
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Use cases
The Cost Plus approach can work well for price setting of manufacturers—after which testing takes place at the TNMM Net Cost Plus Margin. Further, it may be used for procurement activities. A bit similar to the Resale Price Method for distributors, this method can be helpful in price setting for manufacturers.
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