Meaning
Valuation technique used in trade agreements determines the origin of a product by subtracting non originating material costs from the total cost. This method provides a clear picture of the value added within a specific region by excluding profit and certain promotional expenses. Using the net cost formula ensures that only the actual production costs are counted toward the regional value threshold.
Origin Calculation
Calculation steps involve identifying all costs associated with the production of the good and then removing the price of imported parts. For the net cost formula, this process requires a detailed bill of materials that lists the origin of every nut and bolt.
Expense Allocation
Direct labor and overhead must be apportioned correctly to the specific product being evaluated. When using the net cost formula, a factory that makes multiple items must have a system for splitting utility and management costs across the different lines.
Audit Standard
Trade inspectors use this specific method to verify claims made under free trade agreements because it is harder to manipulate than transaction value methods. Because the net cost formula relies on internal accounting records rather than sales prices, it provides a more stable and verifiable measure of local participation in the manufacturing process. Organizations prefer this method when the price of the final product fluctuates wildly due to market demand but the production costs remain steady.
