Cost escalation is the process of determining the percentage increase in a product’s cost over time. On a large scale, cost escalation is used to determine inflation for our nation’s economy. Business owners need to take into consideration cost escalation of all products or inventory purchased for business use because as costs rise, the business needs to adjust the price of its goods and services to absorb the cost escalation and continue to maintain the same level of profitability.
Subtract the old cost of the item from the new cost of the item. Make a note of the difference. For example, if the new cost of the item is $115 and the old cost is $95, then $115 minus $95 is $20.
Divide the difference between the old cost and new cost by the old cost. For example, $20 divided by $95 is .210526.
Convert the decimal number computed in Step 2 to a percent by moving the decimal place two spaces to the right. For example, .210526 becomes 21.0526 percent. The calculated percentage is the cost escalation for the item.
To ensure you’ve properly calculated a cost escalation, multiply the percentage times the old cost. If the amount of the calculation equals the difference between the old and new prices, then your calculation is correct.
- "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991
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