The Pricing Decision: Balancing the Cost-Based and Market-Based Approaches in Different Industries

The objectives of this paper are to discuss cost estimating and pricing issues in four different industries, to analyze methods and strategies that are used in the costing and pricing of products in those industries, and to make general comparisons about costing and pricing techniques. Accurate projection of costs is essential to the survival of any firm because cost estimates often determine whether a project will be authorized to begin or continue, the amount of resources that will be allocated to a particular product or product line, the prices of products, and the firm\u27s and product line\u27s profitability. Many management accounting experts have discussed the importance of useful product costing systems. They emphasize that analysts can more accurately estimate costs if they have systems that identify casual factors or cost drivers. Robin Cooper and Robert S. Kaplan write that, If the cost system does not correctly attribute the additional costs to the products that cause them, then the firm might end up competing in segments where the scope-related costs exceed the benefits from larger-scale production. Kaplan and Cooper researched data from several companies and found that a significant problem with product costing systems is that costs, particularly fixed costs, are allocated on the basis of a measure such as direct labor hours, which may not be a factor that actually causes these costs. Instead, they suggest the idea of transaction costing, in which costs are assigned to units that cause the transaction to occur. Product costing systems often play an important role in the pricing of products. We will now present some basic pricing concepts to link the costing and pricing processes together