BusinessHABPurchase price allocation: Sometimes it’s hard to tell if a bigger package is really a better value when you’re shopping for items at a store. Fortunately, checking the item’s unit price can help you figure out which package provides the most product for the cost. The unit price is the cost per quantity of item you’re receiving. The quantity might be per item or per unit of measurement, such as ounces, grams, gallons, or liters. To calculate the unit price, simply divide the cost of the product by the quantity you’re receiving or check the store’s shelf label. Then, compare the unit prices of 2 or more packages of the same product to see which is the better value.
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Purchase price allocation
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What is Purchase Price Allocation?
Purchase Price Allocation (PPA) is an acquisition accounting process of assigning a fair value to all of the acquired assets and liabilities assumed by the target company.
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How to Perform Purchase Price Allocation (Step-by-Step)
Once an M&A transaction has closed, purchase price allocation (PPA) is necessary under accounting rules established by IFRS and U.S. GAAP.
The objective of purchase price allocation (PPA) is to allocate the price paid to acquire the target company and to allocate them to the target’s purchased assets and liabilities, which must reflect their fair value.
The steps to performing purchase price allocation (PPA) are the following:
- Step 1 → Assign the Fair Value of Identifiable Tangible and Intangible Assets Purchased
- Step 2 → Allocate the Remaining Difference Between the Purchase Price and the Collective Fair Values of the Acquired Assets and Liabilities into Goodwill
- Step 3 → Adjust Newly Acquired Assets of the Targets and Assumed Liabilities to Fair Values
- Step 4 → Record Calculated Balances on the Pro-Forma Balance Sheet of the Acquirer
1. Check the item’s total price. The unit price is typically a fraction of the total cost of the product. Look at the price tag or use a price scanning tool to find the total price of the product.
- If you have a coupon, subtract the coupon value from the total price before you calculate the unit price.
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Purchase price allocation
2. Find the quantity of the item that the package contains. Look on the label to check the amount of product in the container. The quantity is normally listed on the bottom right corner of the package.
Tip: If the product is priced by item or unit, then the unit price will be the cost of the item. For instance, if you’re looking at watermelons that are $3.98 per melon, then the unit price is $3.98. Similarly, if you were purchasing a single roll of paper towels for $1.50, that’s the unit price.
3. Divide the total price by the quantity to get the unit price. Use your calculator or phone to find the unit price. If you’re doing the math by hand, use long division to divide the total price by the quantity. Here are some examples:
- Let’s say the product is a 6-roll pack of toilet paper for $4.59. To get the unit price, you’d divide $4.59 by 6 to get $0.77. The unit price is $0.77.
- Similarly, you might be considering a 24 oz bottle of shampoo for $13.79. Divide $13.79 by 24, which is $0.57.
4. Variation: Use an online unit price calculator for an easier option. These calculators allow you to enter the item information, then they generate the unit cost.
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Purchase price allocation
5. Look for the unit cost on the product label for an easier option. Most stores include the product’s unit price on the shelf label for that product. Typically, the unit price is printed in small type in the top or lower left corner and may have a box around it. Check the shelf label to see if the unit price is there.
- As an example, when you’re looking at an 8 oz bottle of olive oil that costs $5.79, you might see a unit price of $0.72 printed in small type in the corner of the label.
6. Calculate the unit price of the items you’re planning to buy. Divide the total cost of each product by the quantity in the package. Get the unit price for each item.
- For instance, let’s say you’re trying to choose between a 6-roll pack of toilet paper for $4.59 and a 9-roll pack of toilet paper for $7.29. To get the unit prices, calculate $4.59/6 = $0.77 and $7.29/9 = $0.81.
- Alternatively, you might be trying to choose between a 32-oz family-sized box of cereal for $4.89 and a 12-oz regular-sized box of cereal for $2.29. You’d calculate $4.89/32 = $0.15 and $2.29/12 = $0.19.
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7. Choose the item with the lowest unit price. Generally, the product with the lowest unit cost is the best value. Compare the unit prices that you calculated to see which one is lower. Then, purchase that product.
- As an example, if a 6-roll pack of toilet paper has a unit price of $0.77 and the 9-roll pack has a unit price of $0.81, the 6-roll pack is the best choice.
- Alternatively, a family-sized box of cereal is a better deal at a unit price of $0.15 versus a smaller box at a unit price of $0.19.
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Purchase price allocation
8. Make sure that the quality of the items is similar, if that matters to you. Typically, items that are of lesser quality will have a lower unit cost. You might still choose to purchase the less expensive item. However, consider the quality of the items when making a final purchasing decision.
- For example, a toilet paper that has a thicker ply or more sheets may have a higher unit cost than single-ply toilet paper with a low sheet count. In this case, you might decide that the higher-quality toilet paper is a better value for you.
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It’s best to compare unit prices on products that are of a comparable quality. Otherwise, it may be difficult to recognize which product will actually be the best value.
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