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Pricing and Cost Allocation

The idea of the necessity of COST ALLOCATION has been argued both pro and con very convincingly. Some experts assert that no fixed costs should be allocated to departments or products, suggesting that this kind of cost averaging prevents companies from making good decisions by obscuring the true cost of providing "the next" unit of goods to their customers. They claim that a more relevant and appropriate system would assign only variable costs. This argument supports the economic idea of marginal cost. Others argue just as convincingly that without assigning the total cost of goods and services to units produced, a true cost of providing the good or service cannot be determined and companies could not operate.

Answer this: In other words, if you are driving in your own car to another city, how much will it really cost you to make that drive? Should you include the cost of the car, part of the cost of the car, none of it? What if a friend asked if he could ride with you? What is the cost of the second passenger?

Solution Summary

This solution of 126 words answers whether fixed cost should be considered while pricing the product/service offered.