A new process‐based cost estimation and pricing model considering the influences of indirect consumption relationships and quality factors

In a manufacturing environment containing complex consumption relationships and quality influences, the application of traditional activity‐based costing (ABC) method is limited. In this paper, a new improved process‐based model for cost estimation and pricing is presented. Through utilizing the input–output analysis method, the complex indirect consumption relationships (such as reciprocal relationships) of a manufacturing system are expressed. By solving these relationships, the consumption characteristics of all production activities (mainly presented by the activity rates) are extracted. Then with the consumption characteristics, the quality characteristics and usage amounts of these activities, the cost prices of products are estimated for their pricing. A case study is given based on the compressor products of a manufacturing company, and its effectiveness is shown. As the cost influences of complex consumption relationships and quality factors are fully considered, the proposed approach has a higher estimation accuracy than the traditional ABC method.