COST METHOD
1. Concepts
A method based on the comparison of the value of assets subject to price appraisal with the cost of manufacturing assets of the same usefulness as assets subject to price appraisal.
2. Principles of application
- Principle of substitution;
- Contributing principles
3. The applicable cases
- Appraisal for specialized properties.
- Appraisal for insurance purposes.
- Machinery, equipment and special equipment.
- Often used as a test method for other valuation methods.
4. Value base
Market value and non-market value (when using the depreciation expense method).
5. Methods of determining costs
5.1. Renewable costs
It is the present cost of making a replacement machine exactly the same as the target machine to be assessed, including the outdated points of the target machine.
5.2 Replacement cost
It is the current cost incurred in the production of a machine with a value equivalent to that of the target machine that needs verification according to the current standards, designs and structures.
6. Classification of expenses
Based on different criteria, production costs of enterprises can be divided into different categories.
6.1. Classified by factors of production costs
- Main materials purchased from outside.
- Auxiliary materials purchased from outside.
- Fuel purchased from outside.
- Energy purchased from outside.
- Salary.
- Amounts deducted in accordance with State regulations.
- Depreciation of fixed assets.
- Other expenses in cash.
6.2. Classification of production costs by item of cost price
According to these categories, the enterprise's production costs include the following:
- Main material.
- Auxiliary materials.
- Fuel.
- Energy.
- Wages for production workers.
- Social insurance of production workers.
- General production costs.
- Losses in production.
Add all of the above items to the production costs of the product or service.
- Selling expenses (or circulation costs):
+ Direct consumption of the product.
+ Marketing expenses.
- Enterprise Cost Management.
7. Approach steps
- Step 1: Comprehensive assessment of the status of machinery and equipment to be assessed.
- Step 2: Estimate the current costs of manufacturing new or similar equipment.
- Step 3: Estimate the total accumulated depreciation of the machinery and equipment to be appraised (including intangible wear and tear).
- Step 4: Estimate the valuation result by subtracting accumulated depreciation from the total current cost of manufacturing.
8. Conditions required and limitations of cost method
8.1. Limitations of cost method
- The estimation of manufacturing costs and accumulated depreciation is difficult to implement and depends on the implementer.
- This is a test method for other valuation methods.
8.2. Conditions required
- The implementer must have sufficient technical knowledge and experience;
- Understand the issues related to the economic age, the remaining age, the wear and tear of machinery and equipment (tangible wear and tear - material wear and tear, invisible wear and tear - functional wear and tear economy,...)
- Knowledge of operating principles, manufacturing methods, raw materials, manufacturing and manufacturing of machinery and equipment.
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