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. Joint costs are the costs of the common input that is put into the joint products. An example of joint products would be the various types of fuels that are made from crude oil (Jiambalvo, 2007). Joint costs are commonly found in extractive, agricultural and chemical industries. They are also found in industries where different types or grades of the same product are made. It is very vital that the system used to cost the products incorporates the consumption of resources by product. If this is not done properly costs will be unclear and unprofitable products are likely to be produced (Tunes, Nyrud & Eikens, 2008).
Horngren et al., 2006 wrote about four methods used for the allocation of joint costs. These Four methods are sales value at split off point, physical measurement, net realizable value (NRV) and constant gross margin percentage NRV. In sales value at split-off point the relative amount of cost and the relative amount of sales value are the same. In physical measurement the physical part of the product that is relevant at the point of split off what will be the cost allocation key. When using NRV subtract