A Critical Overview of the Use of Full-Cost Data for Planning and Pricing

Abstract

Surveys show that many firms use full cost to set prices. However, principles of relevant costing imply that product prices should be independent of how a firm allocates fixed manufacturing cost to products. Recent research tries to resolve this conflict between theory and practice by expanding the scope of the problem; pricing is only one part of the larger problem of determining which products to keep and which products to drop, how much capacity to install, and how to allocate available capacity among the products. An emerging view is that we must jointly consider the capacity-planning and product-pricing problems to clarify the role of full costing in these decisions. In this article we provide a critical overview of the results from this research, highlight how a combination of analytic and numerical methods have contributed to our understanding, and suggest directions for future research.