Replacement cost profit

Replacement cost profit is a measure often used by oil companies. It is a profit figure that calculated using the cost of supplies at the cost of replacing supplies at current prices, rather than the prices at which they were actually bought. Current prices usually means the average purchase price over a period.

The replacement cost profit is useful because it excludes the profit or loss made by carrying stock.

If inventory levels have not changed, then replacement cost profit should be the same as profit calculated using LIFO costs. If stock levels have changed LIFO based and replacement cost profits will be different. Unless price movements have been extreme or the change in stock levels very large the difference is unlikely to be material.

As replacement cost profit is not an IFRS measure (or a GAAP measure where that still matters) its exact definition may vary a little from company to company.