Cost Approach


The Valuation Approach is the general orientation or economic point of view an appraiser uses in formulating a specific appraisal and arriving at a value each object.

There are three approaches to valuation used in most types of appraisals, whether for real estate, business valuation or personal property.

The three approaches are: the cost approach, how much it cost to manufacture an object; the income approach, how much income an object can generate or produce; and the comparative market data approach, how much the object appraised is worth when compared to similar and like items offered on the market place.

An object valued according to the three different approaches may be determined to have three distinctly different values. For example, a drawing, which is valued at $300 using the cost approach, may be worth $25,000 under the comparative market data approach, and, $150,000 when the income approach is applied. Consequently, it is important that the appraiser, when determining the scope of the appraisal, chose the appropriate valuation approach. This is generally determined by the specific nature of the object and the purpose for which the item is being appraised.

The Cost Approach refers to the valuation method used by the appraiser to determine how much it cost to manufacture or recreate an identical object such as the one under consideration.

Generally this valuation approach is not applied to fine arts for several reasons. First and foremost, paintings, drawings, prints and sculptures are, for the most part, unique items, and the creator, if still alive, would probably be hard pressed to recreate them exactly as they now exist.

In addition, the cost of materials and labor usually does not determine the value of the piece – e.g. the cost of the canvas and paint has no influence on the valued of the paining; the cost of charcoal, pencil and paper does not determine the valued of a drawing,; the cost of the printing and paper does not determine the value o a dine art print.

Within the decorative art, however, when hand crafted objects are created more than once by the same artisan, the cost approach may be appropriate for the appraiser to apply, after due consideration. There may be instances where it mat be possible to recreate a specific object; and the cost of labor and materials may be the determining factors in the pricing of that object.

Even within the area of fine arts, there may be instances in which the appraiser may use the cost approach. When valuing motion pictures, for example, the cost of creating a new print from an existing negative, (i.e. laboratory costs and copyright payments), may be considerably more that the price a vintage copy in poor condition, of the same movie, would fetch on he open market.

From examination of this approach to valuation, one can begin to understand that the job of the appraiser can frequently involve the expertise of an economist, who is required to analyze market conditions and economic theory, together with the skills of a museum curator, who is required to make assessments of quality and artistic merit when considering works of art.

This article first appeared in the Antiques and The Arts Weekly, April 28, 1995, p.42 and was written by Victor Weiner.