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The Business and Accounting Advisor

Business survivability in this economy is difficult at best. This blog will offer useful business and accounting advise and ideas for ongoing business and competitive advantage.

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Shoud Joint Costs dictate prices between Products?

September 9th, 2011 at Fri, 9th, 2011 at 1:10 am by glennsmith

From a decision point of view Garrison, Noreen and Brewer (2010) argue that a great difficulty can come with the attempt to allocate costs among joint products. They provide in their text a story of a company that dumped a perfectly useful and sellable product instead of selling it for fertilization purposes. This was a mistake that was rectified and then because of misallocation of joint costs remade. The allocated costs were not directly tied to the new fertilizer product. This is the difficulty faced when costs are allocated among joint products.

Borland and Howsen (2009) argue that the problem with the case presentation by Garrison, Noreen and Brewer is that it is an oversimplification that rules out relevant costs. Garrison, Noreen and Brewer describe the situation with dumping but leave out the fact there may be fees associated with dumping that may very easily total more than the $25,000 additional cost placing the creation of the product back into a profitable category.

The difference between making one product and making many can easily be argued as the reason for cost allocation between products. I would argue that understanding of the products sold may be missing if a company truly believes there is only one product. There may be many but the significance of the products are overlooked as they are typically small in nature. Take for example a great Maple Valley company Bike Masters and Boards. This company is a retail bicycle sales, service, repair and rental company. They sell many products but their main focus is on bicycles. The fact that the bicycles sold may be their number one product could be the keypoint to a mistake of cost production. All costs may be assigned to this one activity while many different products are sold such as bicycle gear and even skateboard.

In the same way lot sizes may be an area where joint costs can be allocated. Perhaps sales lot sizes differ in such a way that allocating costs between the various sales lots may be beneficial. Teunter, Bayindir and Heuvel (2006) argue that lot size can be a determination when considering the allocation of costs.

There are a few different ways to allocate percentages of costs. The time it is typically done is the split off point. When the same product is used to create by products such as rubber making tires for both bikes and automobiles the costs would be allocated upon the split off or sales potential at split off point.

Borland, M. V., & Howsen, R. M. (2009). Course Presentation of the Joint-Products Problem with Costs Associated with Dumping. [Article]. Journal of Economic Education, 40(3), 272-277.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2010). Managerial Accounting (13th ed.). Boston, MA: Mcgraw-Hill Irwin.

Teunter, R. H., Bayindir, Z. P., & Den Heuvel, W. V. (2006). Dynamic lot sizing with product returns and remanufacturing. [Article]. International Journal of Production Research, 44(20), 4377-4400.

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