This document discusses cost-based pricing strategies and compares traditional costing approaches to activity-based costing. Traditional costing allocates overhead expenses arbitrarily, which can reduce customer value. Activity-based costing links resource expenses to the variety and complexity of goods and services, yielding more accurate cost information. However, when setting prices, customers care more about the value of the product to themselves rather than the production costs to the firm.

1. Welcome to

2. Cost-Based Pricing
– Set prices relative to financial costs
(problem: defining costs)
– Activity-Based Costing
– Pricing implications of cost analysis

3. Traditional vs. Activity-Based Costing

4. Traditional costing approach
– Emphasizes expense categories (arbitrary overheads
allocation)
– May result in reducing value generated for customers

5. ABC management systems
– Link resource expenses to variety and complexity
of goods/services produced
– Yields accurate cost information

6. When looking at prices, customers care about
value to themselves, not what service
production costs the firm