Profiting from Cost Mis-Allocation: An Analysis of the Interaction Among Biases in Reported Costs and Full-Cost Pricing

Abstract

Accuracy of cost accounting systems is a central issue in management accounting theory and practice. Over time a large set of allocation mechanisms has been developed and refined with the goal of providing accurate cost estimates of objects. Any bias in provided cost information is supposed to lead to sub-optimal decisions, however, this is true only if a perfectly rational decision making process takes place. During the last few decades, many survey based research on firm's pricing highlighted the widespread use of full-cost pricing. In this paper we analyze the interaction between biases in the costing systems and full-cost pricing. Results show that under certain circumstances firms may profit from biases in the costing system when such a kind of pricing approach is employed.

Keywords: biases, costing systems, mark-up, full-cost, decision making