Costing and Pricing Decisions

Costing & Pricing Decisions

7. Costing & Pricing Decisions – Write an essay on the practice of cost allocations (particularly joint costs, sunk costs, and opportunity costs) and pricing decisions (e.g., cost-plus pricing, target costing, and activity-based pricing) in corporations. Include in your discussion the major differences in those various approaches and their appropriateness in the context of the nature of costs, industry differences, competitiveness, etc. Also relate the implications for firm’s profitability (Text Material: Jiambalvo – Chapters 7 & 8).

Cost

In most research articles, cost defined as the amount of expenditure (actual or notional) incurred on, or attributable to a given thing. Brown (2011) mentions that the term cost cannot be exactly defined. Its interpretation depends upon the following factors; the nature of business or industry and the context in which it is used.

It is very hard to not agree with Brown because, in a given business the cost might be a purchase of the item, or in another business, the cost might be the hourly wages of the workers, or a rental amount where the business is conducted. Cost also can be categorized into different branches. Purchasing an item from a factory can be categorized as “factory cost” or the amount of funds that spent on the office workers to make sure item has been purchased and stored in the company’s storage for sale can also be categorized as “office cost”.

Although there can be more than three, Brown (2011) discusses three broad elements of cost. The most important element called “material”. Material is defined as the substance that can be changed to obtain certain product. Material also can be divided in to two groups; direct and indirect material. Direct material is basically the main components of the finished product. For example the leather that used to make shoes. On the other hand, indirect material is the material that is not used in the finishing...