The use of activity-based costing in pricing decisions - the example of prune production

Abstract

This paper explores the scopes of use of costing information for setting product prices in a competitive market. Setting the optimum product price that reconciles shareholders' and customers' long term goals has never been more difficult. Previous researches have proved the paramount importance of costs for pricing decisions. This paper investigates the influence of ABC costing information on pricing decisions and argues on their dominance over traditional costing systems. Using the hypothetical example of a prune producing company, the analysis reveals significant differences between traditional and ABC cost prices of products, highlighting the benefits of ABC approach. Tracing costs to various production-related activities within a company, the ABC model gives a detailed insight into the types and amounts of costs of attaining specific product characteristics and satisfying different customer demands. This way, the ABC provides the management with considerable discretionary power for pricing decisions, setting a sound basis for product and customer profitability management as well as for the creation of long-term value for shareholders.