An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Sylvia Hsingwen Hsu
University of Wisconsin - Madison

Abstract: This study investigates how firms with long-term capacity commitment determine allocated costs in negotiating prices when they experience different levels of capacity utilization and demand stochasticity. The results provide empirical evidence on the debates of full cost pricing versus variable cost pricing. Using service prices of California hospitals, I demonstrate that the level of capacity utilization positively affects the association between price and unit allocated cost. Hospitals with a high level of capacity utilization put a large weight on allocated costs, which measure the opportunity cost of capacity usage; In contrast, hospitals with a high level of excess capacity put no weight on allocated costs since allocated costs are irrelevant to pricing. Furthermore, my findings suggest that hospitals reduce the weight of allocated costs with increased demand stochasticity since demand stochasticity increases the measurement error of opportunity costs measured by allocated costs.

Back to Session Listing

AAA Home Page