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What Is Cost Recovery?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 August 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Cost recovery is the process of recouping the cost associated with the purchase price of certain qualified assets over a period of time. Depending on the type of asset involved, the recoupment process may involve the application of depreciation over a period of months or years, or the assessment of fees for use that over time offset the initial cost. The term is also used to refer to the process of charging customers for the use of a service, rather than the business or other organization covering that cost without any assessment of fees of charges to the customer.

The general concept of cost recovery is to over time recoup or offset the initial cost that is incurred as the result of some type of transaction. In retail circles, companies calculate the amount of units of a given product that must be sold in order to recoup the total costs of purchasing that product from a manufacturer, then setting prices to customers at a level that makes it possible to cover that cost as well as earn some sort of profit. For example, grocer may determine that the cost of buying canned green beans from a particular manufacturer works out to $0.25 US dollars per can, making it easy to set the retail price at $0.50 USD per can. Doing so makes it possible to manage cost recovery with relative ease while still making a significant amount of profit off each sale.

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The extension of services is also subject to the task of engaging in cost recovery. In this scenario, client fees are often assessed as a way of recovering the costs necessary to providing those services. By doing so, the organization that is extending the services is able to remain self-sustaining and continue to operate over the long term. When it becomes impossible to recover the cost of doing business, the organization will begin to decline and eventually fail.

Businesses of all sizes engage in the process of cost recovery. Simply put, unless there is some sort of revenue generation that makes it possible to recover the costs incurred during the process of providing goods or services as part of the operation, the chances of survival are slim. By having a clear grasp of the costs involved in the operation it is much easier to determine the break even point for the business operation, and also determine how to set customer pricing so the cost of operating is covered while still extending pricing that is competitive enough to attract and maintain a customer base.

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