The Value of Activity-Based Costing in Competitive Pricing Decisions

Abstract

This paper reports experimental evidence on the merits of activity-based costing (ABC) for price-setting in competitive markets that differ in their ability to provide informative feedback. Earlier research has shown that informative market feedback dominates the effects of cost-system design. In a multimarket context involving cost allocations, the present results suggest that cost-system refinement can play a significant role in price-setting, even in the presence of informative market feedback. Specifically, ABC provides benefits over volume-based costing in market segments in which biased cost allocations produce accounting losses that hinder learning from superior competitors. Compared to these informative settings, additional evidence also shows that performance is negatively affected by less informative market feedback. Yet in less informative settings, ABC still outperforms traditional costing, presumably because it helps to filter irrelevant competitor feedback from the decision process.