Net Cost Plus: The Depreciation-Excluded Cost PLI

Definition

Net cost plus (NCP) is the cost-based PLI computed as the operating profit over the net costs — the costs excluding the depreciation (and the amortisation, on the same logic). The exclusion is the point: the depreciation is the accounting charge for the assets, and the asset-based return PLIs (ROA, ROCE) price the assets’ return directly — a PLI that carries the depreciation in the denominator and an asset return in the numerator’s economics double-counts the asset. Net cost plus is the cost-plus PLI for the asset-intensive tested party, where the depreciation is a material cost component and the OP/OC denominator would carry it.

Net cost plus = operating profit ÷ net costs
               (net costs = the operating costs − the depreciation
                (− the amortisation, on the same logic))

vs OP/OC      = operating profit ÷ the operating costs (the depreciation in)

The use	The content
The asset-intensive tested party	The manufacturer / the contract manufacturer with the material asset base (the plant, the equipment) — the depreciation is a large cost component, and NCP prices the return on the cash costs, the asset’s return handled by the asset PLI where the asset is the tested party’s own
The comparability	The pool’s NCP on the same definition (the depreciation excluded, consistently) — the members’ asset structures comparable, or the difference the working-capital / the asset adjustment question
The documentation	The definition stated (the net costs as defined, the depreciation excluded, the amortisation treated) and applied identically to the tested party and the pool

The working distinction (the PLI reference): the choice between OP/OC and NCP is the asset structure question — the tested party whose costs are mostly the people / the services (the KPO, the shared services) runs on OP/OC (the depreciation is small, the cost base is the effort); the tested party whose costs carry the material depreciation (the manufacturing, the contract manufacturing on the owned assets) runs on NCP, where the depreciation’s double-count is the comparability risk. The contract manufacturing guide has the cost-base design on the asset-intensive facts.

Example

The tested party (an Indian contract manufacturer) runs the production on the owned plant: the operating revenue is ₹300 cr, the operating costs are ₹270 cr (of which the depreciation is ₹30 cr), the operating profit is ₹30 cr. The OP/OC is 30/270 = 11.1%; the net cost plus is 30/(270−30) = 30/240 = 12.5%. The pool (the comparable contract manufacturers, the same NCP definition) distributes at the IQR 11%–14%, mid-point 12.6% — the tested party sits inside, on the NCP. The choice is documented: the depreciation is the material asset charge, the asset is the tested party’s own (the asset’s return is in the NCP’s numerator economics, not double-counted in the denominator).

See also

• OP/OC (Operating Profit to Operating Costs)
• ROA (Return on Assets) · ROCE (Return on Capital Employed)
• Contract Manufacturing TP

FAQ

When is NCP preferred over OP/OC? Where the depreciation is a material cost component — the asset-intensive operations (the manufacturing, the contract manufacturing on the owned plant, the equipment-heavy services) — and the asset is the tested party’s own, so the asset’s return belongs in the profitability measure and not also in the cost base. Where the depreciation is small (the people-cost operations), OP/OC is the PLI of record and NCP is the variant without the comparability benefit.

Does NCP remove the working-capital adjustment? No — NCP addresses the depreciation in the denominator (the asset’s accounting charge), not the working capital (the current assets and liabilities, the days). The working-capital adjustment runs on the current-position difference (the working capital adjustment); the asset structure (the depreciation, the asset base) is the NCP / the asset-PLI question, and the comparability adjustments guide has the two questions kept separate.

Where does the NCP definition appear in the documentation? In the PLI block of the benchmarking annex: the PLI chosen (the NCP), the definition stated (the net costs as defined — the depreciation excluded, the amortisation treated), the choice’s rationale (the asset structure, the depreciation’s materiality), and the pool on the same definition. The TPO’s examination of the PLI starts at the definition — the NCP file that states the choice and the rationale is the file the PLI reference describes as the defensible one.