Executive answer
The cost plus method begins with costs incurred by a related provider in a controlled transaction and adds a comparable markup rewarding its functions, assets and risks. It may be suitable for contract manufacturing, semi-finished production or services where a traceable cost base and reliable independent markups exist.
Article 180, section III, of the Mexican Income Tax Law recognizes the method. Its main challenge is not calculating a percentage but defining the base. Including a cost unrelated to the function increases remuneration; excluding a relevant cost decreases it. Pass-throughs, idle capacity, shareholder activity, duplication, extraordinary items, depreciation and allocations need a reasoned treatment.
A defensible analysis connects the agreement, FAR, chart of accounts, cost centers, allocation keys, comparables and reconciliation. It shows why every category is included, excluded or treated separately. Apply the markup only after that logic is closed.
Method logic
In simplified form, comparable costs plus an appropriate gross margin equal arm’s length consideration. Review the statutory definition and its application. In practice, “cost” may mean direct, indirect, operating or total cost depending on the dealing and comparable data.
Illustration: an entity performs services with direct costs of 60, attributable indirect costs of 20 and third-party pass-through expenses of 20. If the remunerated base is 80 and a comparable markup is 8%, value-added profit is 6.4. The pass-through 20 may be reimbursed without markup only if the facts and comparables support that treatment. Applying 8% over 100 would produce 8 and a different conclusion.
The file should contain two bridges: accounting to cost base and cost base to invoice.
When it may be appropriate
The method often fits routine services, shared centers, manufacturing under specifications, assembly and other functions where the provider owns no unique intangibles and controls no material market risk.
Reliability declines when cost does not correlate with value, the provider contributes unique intangibles, makes strategic decisions, inefficiency perversely increases profit or comparable companies classify costs differently. An inefficient company should not automatically earn more because it spends more.
Assess internal CUP first. Third-party services or independent manufacturing may provide prices or markups. Cost plus is not selected merely because the company can access its own costs.
Delineate the function
Document who requests, designs, performs, supervises and accepts. For manufacturing, identify who purchases materials, sets the schedule, controls quality, owns inventory, decides capacity and bears warranty. For services, determine who sets scope, allocates staff, supplies methods and receives benefit.
Identify assets, personnel, systems and risk. The base should reflect resources used for the dealing. Costs from another function should not be included for convenience.
Where idle capacity exists, determine who controlled volume and risk. Do not automatically transfer all idle cost to the related customer through the markup.
Cost taxonomy
Direct costs
These can be identified with the dealing: employees, materials, dedicated licenses or third parties. Validate time, consumption and center.
Attributable indirect costs
Supervision, facilities, IT, human resources or administration supporting multiple dealings. Allocate using a key related to causation or benefit.
General expenses
Management, corporate and other overhead. Determine whether they belong to the provider, benefit the recipient, represent shareholder activity or duplicate another service.
Pass-through costs
External costs over which the provider adds no value and controls no risk may in certain facts be excluded from the markup base. Document agency or principal status, selection, responsibility and independent behavior.
Extraordinary items
Restructuring, fines, casualties or errors do not enter automatically. Analyze cause, control and independent treatment.
Capital and depreciation
Assets used may be reflected through depreciation or another return. Align with comparables and avoid duplication.
Cost-base bridge
| Category | Ledger amount | Adjustment | Base | Reason | Evidence |
|---|---|---|---|---|---|
| Direct personnel | Attributable time | Payroll and time | |||
| Materials | Consumption | Orders and inventory | |||
| Third parties | Received service | Invoices and outputs | |||
| Shared IT | Users or use | Systems | |||
| Facilities | Space or occupancy | Agreements and area | |||
| Administration | Support | Organization chart | |||
| Pass-through | No added value | Original agreement | |||
| Extraordinary | Cause and risk | Approval |
Reconcile totals to the trial balance and invoice. Record sign, period, currency and version.
If the markup applies to “total expenses” without a category bridge, clean the cost base before validating the percentage.
Allocation keys
Select keys linked to benefit or consumption: hours, users, transactions, orders, space, equipment or payroll. Revenue or headcount may fit some functions but are not universal.
Test stability and data quality. Do not change the key to achieve a target charge. Document population, exclusions and treatment of partial periods.
A composite key may help when a function has several drivers, but adds complexity. Compare improved accuracy with measurement cost.
Selecting the markup
Search internally first for services or manufacturing supplied to third parties. Compare function, assets, risks and cost definitions. A market markup applied to a different base is not comparable.
For external data, review accounting classification and profile. Public statements often provide net margins rather than gross cost-plus markups. Do not convert without data. Determine whether the indicator uses total cost, operating cost or value-added expense.
Document range, period, adjustments and median under applicable rules. Keep the markup separate from other returns such as asset ownership or financing.
Pass-through four-question test
- Who selected the third party?
- Who controls quality, price and risk?
- Does the provider contribute people, assets or decisions?
- Would an independent party charge for coordination?
If the provider negotiates, supervises and remains responsible, value may exist. If it merely pays on the recipient’s behalf, it may not. Do not decide from an account label.
Retain the third-party agreement, invoice, payment, authorization and traceability to the recipient. Reimbursement does not remove VAT, withholding or documentation requirements.
Manufacturing
Define raw material, inventory ownership, scrap, quality, capacity, maintenance, tooling, warranty and planning. Contract manufacturing may support cost plus where risks are limited and the base is comparable.
Analyze idle capacity. If the principal sets volume and the manufacturer cannot redeploy capacity, the principal may bear it; if Mexico chose investment or utilization, risk may remain locally. Do not bury idle cost in the base.
Segment products and functions. One plant may manufacture for related and third parties, perform engineering and distribute. An aggregate base distorts the result.
Services
First prove existence and benefit. Then identify activity costs, beneficiaries, allocation key and markup. Exclude shareholder activity, duplication and incidental benefits where appropriate.
The service catalog should connect teams, outputs and accounts. Time may be useful but needs controls. Budgeted cost requires a true-up to actuals and variance explanation.
One center may provide services with different value. Do not apply one markup without assessing categories.
Budget and closing
Policy may invoice on budget and adjust to actual costs. Define frequency, tolerance, idle capacity, extraordinary treatment and exchange rate. Monitor base and markup monthly.
Separate true-up changes caused by volume, mix, efficiency, third-party price and classification. Coordinate counterparty, invoice, accounting and taxes.
Avoid perverse incentives. Efficiency metrics and limits prevent additional spending from producing automatic additional profit.
Variance and efficiency diagnostic
Compare actual with budget by volume, price, mix, staffing, third parties, currency, idle capacity and extraordinary items. Do not silently add a variance to the base. Identify the decision-maker and party controlling the underlying risk.
If the local provider uses more hours because of its own inefficiency, an independent customer may not pay all of it. If the principal changes scope or volume, remuneration may need adjustment. Support the cause with orders, tickets and approvals.
Use operating indicators beside markup: cost per transaction, time, defects, utilization and service levels. They prevent the model from rewarding spending alone. Targets should be reasonable and do not replace arm’s length testing.
Governance of the base
Assign an owner to every category and key. Accounting maintains account mapping; operations confirms consumption; tax approves treatment; the recipient confirms benefit. Changes require an effective date and version.
Quarterly, review new accounts, centers, pass-throughs and unusual items. At year-end, freeze the base used, reconcile the invoice and preserve the adjustment bridge. Automated rules may classify candidates, but ambiguous items need human review.
Report material exceptions: costs without a beneficiary, stale keys, markup on pass-throughs, idle capacity and differences between agreement and invoice. Resolving these in-year reduces true-ups and later defense work.
Common errors
- Applying markup to the entire trial balance.
- Excluding indirect costs without analysis.
- Treating all third-party costs as pass-through.
- Including shareholder activity.
- Using revenue as a universal key.
- Comparing markups over different bases.
- Rewarding inefficiency without control.
- Mixing manufacturing, services and distribution.
- Ignoring idle capacity and extraordinary items.
- Failing to reconcile the base with the invoice.
Quality control
The Cost Base Review provides the taxonomy, bridge, keys, pass-through decisions, markup, range, formula and process. A second reviewer traces the sample from ledger to evidence and recalculates the charge.
Operations validates function and consumption; accounting accounts; tax method; recipient benefit; leadership exceptions. Preserve the approved version and changes.
Related topics
- PT-017 through PT-019: FAR, comparability and method.
- PT-031: intragroup services.
- PT-054: Safe Harbor cost base.
- PT-079: contract manufacturing.
Cost-base certification
Build the base from accounts and cost centers rather than a total sent by email. Classify direct, indirect, pass-through, idle, exceptional, shareholder and out-of-scope costs. For every inclusion, state its connection to the service or manufacturing activity and allocation rule. Reconcile the bridge to the ledger and invoice.
Then test consistency among agreement, conduct and remuneration. Determine which party controls efficiency, capacity, purchasing and risk; the base should not automatically pass through costs an independent party would reject. Compare accounting definitions with comparables and adjust reliable differences before discussing markup.
Provider, recipient, accounting and tax certify their layers. A sample traces cost to support and benefit. The file retains the opening pool, exclusions, keys, final base, markup and sensitivity. This sequence prevents applying a reasonable rate to an economically incorrect base.
Sources and verification date
Compare the final base with budget and prior year. Investigate new accounts, material variances and first-time allocated costs. Trend analysis may reveal misclassification or a real scope change. Document the explanation, evidence and approval before invoicing, and carry unresolved items into the next monthly certification.
- Mexican Income Tax Law, current text, Articles 179 and 180.
- OECD Mexico Transfer Pricing Country Profile.
- OECD Transfer Pricing Guidelines.
Sources checked on August 2, 2026. Base and markup depend on functions, data, comparables and tax treatment.
Request a Cost Base Review to turn the trial balance and operating facts into a clean base, comparable markup and reproducible charge.