Costing and Pricing Decisions

2115 Words Mar 21st, 2012 9 Pages
Running head: COSTING AND PRICING DECISIONS

Costing and Pricing Decisions
Cost Allocations
Cost allocation is the process of assigning the indirect costs of producing a product. These indirect costs may be shared by multiple products. This is where cost allocation comes into play. Indirect costs can be allocated to products, services and departments. Cost allocation allows a company to calculate fully cost of their products. This provides them the ability to price products accurately. Three common costs that need to be considered when allocating costs include joint costs, sunk costs and opportunity costs (Jiambalvo, 2007).
Joint Costs When at least two products come out of a common input they are considered joint products.
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This helps to avoid making decisions based on sunk costs.
A third way to avoid the sunk cost effect that Roberto, 2009 writes about is to take a look at the assumptions being made and discover is they are reality. There are assumptions being made about the company’s ability to recover lost project. Taking a look at these assumptions and determining if they are actually accurate assumptions or just optimism about something that is not possible. The last way Roberto, 2009 writes about to avoid making decisions based on sunk costs is to determine the opportunity costs of continuing with the project instead of ending it. Making decisions based on sunk costs can lead a company to making poor financial decisions and in turn have an effect on being able to price their future products appropriately.
Opportunity Costs
An opportunity cost is a cost that is caused by making one choice over another. An example of this would be if you purchased season tickets to the Ravens with your tax return instead of paying your credit card off with the money. The interest that you continue to pay on your credit card as a result of not paying it off with your tax return would be considered the opportunity cost (Jiambalvo, 2007).

Pricing Decisions McKinsey & Co., 2004 write about the difficulty of pricing an item. The article explains that charging too much for an item is much easier to fix
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