chapter 9 notes
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F.Joint Product Costs and the Contribution Approach. Several end products are
produced from a single input in some manufactur ing processes. Such end products are known as joint
products. The costs associated with making these products up to the point where they can be recognized as
separate products (the split-off point) are called joint product costs.
1. The pitfalls of allocation. Joint product costs are really common costs that are incur red to
simultaneously produce a variety of end products. Unfor tunately, these common costs are routinely
allocated to the joint products. Allocated joint product costs are often misinterpreted as costs t hat could be
avoided by producing less of one of the joint products. However, joint product costs can only be avoided by
producing less of all of the joint products simultaneously. If any of the joint products is made, then all of
the joint product costs up to the split-off point will have to be incur red.
2. Sell or process further decisions. A decision often must be made about selling a joint product as
is or processing it further.
a.It is profitable to continue processing a joint product after the split-off point so long as t he
incremental revenue from such processing exceeds the incremental processing costs.
b. In such decisions, the joint product costs incurred before the split-off point are not relevant. They
would be relevant in a decision to shut down t he joint process altogether, but they are irrelevant in any
decision about what to do with the joint products once they have reached the split-off point.
G.Pricing Products and Services.
1. Cost-plus Pricing. As the name implies, cost-plus pricing involves marking up a cost base. This
approach is often used at least as a starting point in the pr icing decision. The cost-plus pricing
formula is very simple:
Target selling price = Cost + Markup percentage × Cost
The key issues in cost-plus pricing are what cost and what markup percentage to use. The text
discusses the absor ption costing approach. Unit product costs from an absorption costing system are
marked up according to a factor that depends solely on costs and the required ROI. The most
common method for setting target prices in practice is to mark up some version of full cost—either
the unit product cost from an absorption costing system or a unit cost that includes SG&A costs as
well as manufacturing costs. In the text, we discuss the method that uses unit product costs from an
absorpt ion costing system.
a. Markup percentage. The percentage markup on the unit product cost could be determined in
many different ways. It could be common industry practice. It could be a time-honoured thumb-
rule. It could refl e ct management’s beliefs concerning how much markup the market will bear.
Or, t he markup could be computed using the formula t hat appears below:
Note that this for mula assumes that t he unit sales volume is known
before the pr ice has been determined.
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