Full Costing and Pricing Decisions

Posted: 15 Mar 1998

See all articles by Ramji Balakrishnan

Ramji Balakrishnan

University of Iowa - Department of Accounting

Shiva Sivaramakrishnan

Rice University

Date Written: December 1997

Abstract

Using theoretical analysis and simulation experiments, we examine the usefulness of full costs for product pricing. We show that full costs are economically sufficient for pricing when a decision-maker (DM) jointly solves the capacity planning and pricing problems, and has enough discretion in setting prices to ensure full capacity utilization in any demand state (the full capacity utilization condition). In practice, however, informational limitations and cognitive bounds may induce the DM to plan capacity using limited demand information, and update prices when additional demand information becomes available subsequently. There is no economic loss from such problem decomposition if the full capacity utilization condition holds. We use simulation experiments to assess the loss from this decomposition if this condition is not satisfied. We find that using simple full cost plus pricing as an input into capacity planning is cost effective provided the DM reacts optimally to realized market conditions, and has enough pricing discretion to ensure high capacity utilization.

JEL Classification: M40, M46, D40

Suggested Citation

Balakrishnan, Ramji and Sivaramakrishnan, Shiva, Full Costing and Pricing Decisions (December 1997). Available at SSRN: https://ssrn.com/abstract=62609

Ramji Balakrishnan (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0958 (Phone)
319-335-1956 (Fax)

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
2,406
PlumX Metrics