The best way to explain how Google Adwords works out your Cost Per Click is by using an example.

Below is how an auction may look. Please note that the five companies below are fictional and they are all bidding on the same keyword.

CompanyQuality ScoreMax CPCAd Rank
Slumdog Roofing2£0.44.88
Donald Plumbing1£1.251.25
ABC Builders3£0.451.35
Billy Elliot Builders1£0.75.75
Jim Will Fix It1£0.20.20

In the above auction ABC Builders would win. This is because he has the highest Ad Rank. To calculate the Ad Rank you simply multiply the Quality Score by your max CPC.

So how does Adwords work out the price you pay per click?

Working out your actual cost per click can be done using the following formula:

Actual Cost Per Click = (Ad Rank of next highest bidder / Quality Score of winning bidder)

For example:
ABC Builders CPC = (Donald Plumbing  1.25 / ABC Builders QS 3)  (1.25/3) = 41p

So now looking at the table below with the Actual CPC included we can see that Donald Plumbing is willing to pay the most per click but the winning bid is the company with the highest quality score which is ABC Builders.

CompanyQuality ScoreMax CPCAd RankActual CPC
Slumdog Roofing2£0.44.88£0.41
Donald Plumbing1£1.251.25£0.88
ABC Builders3£0.451.35£0.37
Billy Elliot Builders1£0.75.75£0.20
Jim Will Fix It1£0.20.20£0.01