What Is Gross Cost?

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Gross cost begins with the initial purchase of the product.
Gross cost begins with the initial purchase of the product. (Image: Burke/Triolo Productions/Brand X Pictures/Getty Images)

Knowing the gross cost of a product or service can save you money. The gross cost includes the cost of product or service itself, along with any other costs incurred in the purchase process. The term gross cost is sometimes used in relation to certain goods and services, but it can be used more broadly to refer to just about any industry. Assessing the gross cost of any product depends on the industry itself and type of product.

Capitalized Cost

Gross cost is often used synonymously with the term gross capitalized cost. It is typically not used by itself as "gross cost." Gross capitalized cost is often used in the automobile sale and leasing industry. It refers to the cost of the vehicle, along with any additional costs that are incurred as a result of the existing debt or leasing obligation created in the process of buying or leasing the car. For instance, a loan for $20,000 that the buyer pays an additional $10,000 in interest on over five years has a gross capitalized cost of $30,000. Any other items that are capitalized as part of the deal are also added to the gross cost.

Reduction of Cost

In some cases, the gross cost is reduced during the life of a loan or rental agreement. Various deductions can be taken from the gross cost in the form of other money promised in return to the borrower. For example, when buying an automobile, the buyer and lender might agree to a loan in the amount of $20,000 with a total gross cost of $30,000. However, any rebates given to the customer will reduce the cost of the vehicle by putting money back into the pocket of the buyer or applying the money as a down payment on the loan. This is known as a capitalized cost reduction.

Payments

The gross cost of the vehicle is usually realized over the life of the loan or the lease. Because most people do not prepay an entire lease or pay cash for a vehicle, the gross cost is much more than it would have been if they had paid cash up front. Much of this stems from interest costs incurred during the life of the loan. In the case of a lease, the monthly payment is determined in such a way that amount over the principal is used to help account for vehicle depreciation. This cost is incurred by the lessee as well.

Considerations

When deciding upon a lease or loan, the gross cost should be one factor that helps you make your decision, but it should not be the only factor, unless you are paying cash up front for the entire cost of owning or leasing the vehicle. Most buyers do not consider gross cost because they don't feel the effect of the gross cost immediately. Instead, they agree to an amount they can agree to pay each month and this amount becomes the installment toward the gross cost, which is eventually paid in the long term.

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