Eddy Cardinaels; Filip Roodhooft; Luk Warlop,. 2004, The Value of Activity-Based Costing in
Competitive Pricing Decisions, Journal of Management Accounting Research,16, pp.133-148
Numerical examples in the hypotheses are literally ignored in this journal. I just summarized
the crucial parts of the hypotheses.
Objective
-to investigate the potential benefits of ABC for price-setting in competitive markets that differ
in the degree to which a competitors’ results provide informative feedback.
Benefits of ABC
-Claimed by Cooper (1988); Kaplan and Atkinson (1998); Goebel (1998) that ABC have a
value enhancing effect on pricing decisions and profit performance as ABC allows better price
differentiation among products, customers and markets
-Gupta and King (1997) showed that the benefits of cost system refinement for decision
making apply to individual market settings in which firms act as monopolists.
Different Costing System in a more competitive market
-Waller (1999) argued that due to the pressure from market competition to utilize superior
market feedback, a significant benefit over distorted cost data in individual settings may not
necessarily extend to a competitive market.
-Waller (1999) showed that the effects of absorption versus variable costing on price-setting
quickly disappeared in such an environment because decision makers learned from the price
offers of successful sellers in the market.
-Price offers rapidly converged toward the competitive equilibrium.
-Conclusion: the contribution of the cost system is limited because market feedback dominates
accounting information.
-1)Waller (1999) were only concerned with the effects of variable costing versus absorption
costing, as opposed to the broader issue of whether alternative full-costing systems such as
ABC affect pricing decision in a competitive context.
-2) Waller (1999) conjectured that learning from informative market feedback would be more
difficult in a multi-market context that involved costly allocations, presumably because (mis)
allocations may have an effect on an agents’ behavior in a competitive setting.
Multi-market setting
-Cooper and Kaplan (1998): Traditional costing can produce biased cost estimates in
heterogeneous markets
-When such cost allocations overestimate (underestimate) costs for a particular market
segment, firms’ cost systems may report accounting losses (profits) for markets that actually
are profitable (unprofitable).
-Briers (1999) investigated the effects of biased cost data in a multi-product context. Although
he found that participants with biased cost data made improved pricing decisions when they
received market feedback in the form of a benchmark report about the best practice of other
firms, their experimental task did not involve any direct competition. Also he studied
volume-based cost reports, but he did not directly test the effects of an ABC system.
-Conclusion: If cost allocations produce accounting losses under volume-based costing but not
under a more accurate ABC report, then ABC could facilitate competitive pricing even if market
feedback is informative, to the extent that market agents underutilize market feedback under
traditional costing in order to avoid accounting losses.
Hypotheses
-131 Participants receive imperfect cost reports (either ABC or traditional volume-based
costing) and market feed back (either informative or uninformative) in the form of a report
containing the price choices and the profit of their competitor.
Hypotheses 1: aims to predict the main effect of market feedback on decision performance
Evidenced in Prior Works:-Briers (1999) and Waller (1999): Informative market cues strongly
facilitate convergence to optimal performance, as is evidenced in prior work
-Iselin (1996): if the competitors’ price choices are not informative,
the performance will decrease to the extent that decision makers are influenced by these
irrelevant market cues
So we set H1: Prices and profits are closer to optimal when participants receive informative
market feedback than when they receive uninformative market feedback
Hypotheses 2: addresses the main research question regarding the value of ABC in the
presence of market feedback.
Tests whether the benefits of ABC over biased traditional cost data would
disappear in multi-market context in which learning from market feedback is more difficult.
-If this is the case, then the results should reveal an interactive effect for cost
system and competitor feedback, whereby ABC should outperform biased cost data when
market feedback has low informational value, but not when market feedback is highly
informative.
Evidenced in Prior Works:-Iselin (1996): ABC is better able to filter our irrelevant competitor
feedback
-Ashton (1976): participants should base pricing decisions on more
relevant cost data, which should positively influence performance
-Waller (1999): suggested that when marker feedback is informative,
such feedback overwhelms the effects of alternative cost systems for price-setting.
Therefore, we set H2: The benefits of ABC over biased cost data for price-setting fall as
market feedback becomes highly informative
Manipulated Factors
-
market feedback: informative or uninformative
-
cost reports type: ABC or traditional volume-based costing
Market Feedback

Informative Market Feedback
-when the rival is set to play optimally with full knowledge of market parameters
-competitor charged an optimal price, give the subjects’ price choice.
-Frederickson (1992): decision makers have a strong tendency to compare their own
performance against their rival.
-Briers (1999) and Waller (1999): If participants incorporate these informative market signals
into their pricing decisions, then the value of the cost system could be sharply reduce.

Uninformative Market Feedback
-the competitor randomly sets a price close to the subjects’ price which is based on a random
draw from a uniform distribution over an interval around the participants’ price.
-not based on cues of optimal market performance
-starting prices of this random competitor were (as for the participants’ firm) irrelevant is
valuable because it reveals that the competitors’ prices are a poor reflection of actual costs,
thereby helping to filter irrelevant competitor cues from the decision process.
Accounting Report Type
Half of the participants received an ABC report and the other half received a traditional
accounting report.
Evidenced of Prior Works:-Iselin (1996): performance would be enhanced if irrelevant market
cues were filtered from the decision process.
-ABC offers an important advantage over biased cost data.
-The more accurate cost data means that participants with ABC
would be more likely to detect and filter competitors’ prices when these prices are a poor
reflection of actual costs than would participants with biased cost data.
-Consequently, Ashton (1976) and Brier (1997) suggested that
prices under ABC are likely to be based on more accurate cost data rather than on less
relevant market feedback.
-Conclusion: a better performance should be expected under ABC.
Result
-explained by an ANOVA model
-H1 prediction is supported as the main effect of market feedback is significant, participants
will perform better when they receive informative market feedback
-H2:The assumption that ABC is beneficial to profit performance when market feedback is
uninformative, but not when market feedback is informative is not supported as the interaction
term is not significant
Summary
-Contrary to Waller(1999), where he suggested that the effects of alternative cost systems do
not persist when there is opportunity to lean from the market.
-Our study is demonstrating that the above conclusions are not always valid in a multi-market
context involving cost allocations across markets.
-Irrelevant market cues are effectively filtered with more accurate cost data because
participants with ABC reverse the price distortion sooner than participants wit traditional
costing.