The applicability of activity-based costing in pricing decisions

Abstract

The setting of the right price is an objective that a business must achieve. A price set to high is a lost sale while a price set to low is a lost profit. Only when products are priced in relation to demand and cost consumed will a business make both a sale and earn a satisfactory profit. Activity-based costing systems allocate costs to products according to resources consumed by products. Therefore pricing decisions based on activity-based costing systems and demand should lead to the attainment of the above objective. This study intends to identify and portray the applicability of activity-based costing in pricing decisions together with the application of activity-based costing in the Maltese industry. The study will address the following research issues • The application of activity-based costing in Malta with particular reference to its use in pricing decisions. • The application of pricing decisions in Malta. • The applicability of activity-based costing as a basis for setting prices of existing and new products. • The applicability of activity-based costing in price discrimination and transfer pricing. A self-administered mail survey was used in this study. The mail survey yielded a response from 47 firms, a percentage rate of 16%. The study concludes that the majority of pricing decisions are based on product costs arising from traditional costing systems. This study also identifies that traditional costing systems are being invalidated by major changes in the business environment faced by Maltese firms. The study concludes that the adoption of activity-based costing is at 21% while that of activity-based pricing is at 17%. Activity-based costing is being mostly applied by small firms. The consideration of activity-base costing by Maltese firms, particularly that of activity-based pricing, is increasing. There is a perception among Maltese firms that the applicability of activity-based costing in pricing decisions will increase in the future to respond to business environment changes and to increase the competitiveness of the Maltese Industry.