Extended cost involves multiplying the unit cost of an item by the total number of units purchased, including additional charges, to arrive at an average cost per unit. This is useful for setting retail prices and projecting operating costs and profit.
An extended cost is a type of accounting process that involves multiplying the unit cost of an item by the total number of units purchased with a single order. Most such calculations also include additional charges that are associated with the order, arriving at an average cost per unit. This is very useful when trying to understand the total cost paid for each unit, especially when the goal is to resell those units to a customer base.
One of the easiest ways to understand the extended cost process is to consider a local merchant purchasing produce from a farmer. The grocery store determines 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 fee for the order, this means that the extended cost of the order is $50 USD. If the farmer charges a flat fee of $5 for the delivery of the potatoes, this means that the extended cost of the order is $55. As a result, the grocery store has an investment of $0.55 in each potato and can set the retail price to cover expenses and allow some amount of profit to be generated from each potato sold.
Calculating extended cost is important when it comes to setting retail prices for any type of goods or services. Since the process takes into account both the unit price paid for each item and the ancillary 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 sale price that is likely to attract favorable attention from consumers and make it possible to sell all items in stock for at least some amount of profit.
While important for generating revenue, using this same basic formula is also helpful when trying to project operating costs and profit for an upcoming tax period. Doing so makes it easier 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 possible fines or penalties when filing the annual return. . Typically, many companies will assess extended cost regularly during the business year, making adjustments for taxes and sales prices when and as circumstances dictate.
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