Expected cost plus margin approach
The expected cost plus a margin approach estimates standalone selling price by forecasting the costs of satisfying a performance obligation and adding an appropriate margin. It suits services with measurable costs, such as implementation, training or custom development, and fits poorly where costs are not driven by the specific obligation.
Standard references
- ASC 606606-10-32-34(b)
- IFRS 15paragraph 79(b)
- Ind AS 115paragraph 79(b)
Worked example
Illustrative: an implementation package is budgeted at 80 consultant hours at a loaded cost of $95 per hour.
- Expected cost: 80 × $95 = $7,600.
- A 35% markup on cost: $7,600 × 1.35 = $10,260.
- A 35% margin on price is different: $7,600 / 0.65 = $11,692.31.
- The policy must say which one it means and where the percentage comes from.
Result: SSP of $10,260 under a markup-on-cost policy, or $11,692.31 under a margin-on-price policy.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Mixing up markup on cost and margin on price, which changes the SSP materially.
- Using direct labour only and leaving out a reasonable share of overhead.
- Choosing a margin with no support in what the market would pay.