A spread cost is a type of accounting process that involves multiplying the unit cost of an item by the total number of units purchased in a single order.
A spread cost is a type of accounting process that involves multiplying the unit cost of an item by the total number of units purchased in a single order. Most calculations of this type also include any incidental charges associated with the order, arriving at an average cost per unit. This is very helpful in understanding the total cost paid for each unit, especially when the goal is to resell these units to a customer base.
One of the easiest ways to understand the extended cost process is to consider the owner of a local grocery store who buys produce from a farmer. The grocer decides to buy a total of 100 baking potatoes from the farmer at a selling price of $0.50 per potato. If the farmer does not charge any type of handling or delivery charge for the order, it means that the extended cost of the order reaches $50 USD. If the farmer charges a flat fee of $5 to deliver the potatoes, that means the total cost of the order is $55. As a result, the grocer has an investment of $0.55 in each potato and can set the retail price. to cover expenses and allow for the generation of some profit for each potato sold.
Calculating extended cost is important when it comes to setting retail prices for any type of goods or services. Because the process takes into account both the unit price paid for each item and the incidental expenses associated with the sale, the company can determine how much each unit must be sold to break even. From there, the company can assess current market conditions and determine the selling price that is likely to attract favorable consumer attention and make it possible to sell all items in stock at least at some profit.
While important for generating revenue, using this same basic formula is also helpful when it comes to projecting operating costs and profits for an upcoming fiscal period. This makes it easy for the company to plan to remit a certain amount of tax to the appropriate agencies each accounting period, an approach that helps avoid underpayment of tax and the possible imposition of fines or penalties when the annual return is filed. Typically, many businesses will assess the cost spread regularly during the business year, making adjustments to taxes and sales prices when circumstances warrant.