Methods & benchmarking
Cost Plus Method
The cost plus method determines an arm's length price by adding an appropriate mark-up to costs incurred by the supplier in a controlled transaction. The mark-up should reflect the profit that comparable independent suppliers would earn, suiting routine manufacturing, contract production, and low-risk services.
To apply the cost plus method, the relevant cost base must first be identified, typically direct and indirect production costs, though treatment of overheads and start-up expenses can vary considerably. The mark-up is benchmarked against gross margins earned by independent companies within a defensible range.
This method works best where the tested party performs routine functions without owning valuable intangibles, since unique contributions are hard to benchmark with a simple cost-based mark-up. Consistency in accounting practices between the tested party and comparables is essential, as differences distort results.
In practice
What matters when applying cost plus method
- Adds a mark-up to relevant production costs
- Suited to routine manufacturing and services
- Requires consistent cost accounting treatment
- Benchmarked against comparable gross margins
- Less suitable where intangibles drive value
Frequently asked
Common questions
What costs are typically included in the cost base?+
The cost base generally includes direct materials, direct labour, and manufacturing overheads directly attributable to producing the goods or services. Companies must decide consistently whether to include indirect costs, depreciation, or extraordinary items, and this treatment should match how the comparable companies used for benchmarking classify their own costs, otherwise the resulting mark-up comparison becomes unreliable and open to challenge by tax authorities.
How does cost plus differ from resale price method?+
Cost plus is applied from the perspective of the seller or manufacturer, adding a mark-up to costs incurred, while the resale price method works backwards from the resale price charged by a distributor to an independent customer. Cost plus suits manufacturing and service providers with a clear cost base, whereas resale price method suits distributors that add limited value before reselling purchased goods.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.