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Cost and purchase price are the two types of measurement companies use to evaluate the purchasing...

Cost and purchase price are the two types of measurement companies use to evaluate the purchasing performance. What is the benefit of developing performance measures that focus on cost versus purchase price? If the cost is a better performance measurement than cost, should purchase price be used as performance measure at all? Why or why not?

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Answer #1

Cost represents a comprehensive amount of capital associated with the purchase of the product. This gives increased visibility on various parameters that we can improve to cut costs / save money.

Yes, the cost is a better performance measurement than the purchase price. However, the purchase price benchmark is hard to move on from because:

  • Lot of times data is not available to ascertain costs associated with the purchase of product. In such a case purchase price is an easy parameter to look at and compare
  • It is simple and easy to use. no complex calculations are involved
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