Deagnostic market feedback attenuates the benefits of ABC for competitive price setting in a heterogeneous market.

Abstract

Activity-Based Costing (ABC) is intended to assist managers to make better pricing decisions than those taken using traditional volume-based cost methods. The added value of ABC should be assessed against that of signals emanating from the competitive environment in which the firm operates. Prior research has often shown market-based information to be overwhelming, thereby calling into question the wisdom of investing in cost systems to better approximate actual costs. We compare experimentally the pricing decisions of decision makers in a price-competitive duopoly market, characterized by considerable heterogeneity in customer-serving costs. Our results show that the incremental value of ABC depends on the quality of market signals. Decision makers receiving uninformative feedback revert to costing data and ABC outperforms volume-based costing. The presence of a well-informed competitor attenuates but does not completely eliminate the value of ABC.Activity based costing; Managers; Pricing; Decisions; Methods; Value;