In such circumstances, an accurate determination of costs, which constitute a particular service, is crucial. Most of the LSP possessed their own pricing models, which are based on the traditional cost accounting method. However, the
models may not be realistic for the allocation of costs, as the method focuses on direct material and labor costs, while summarizing all other costs to one or more overhead pools that are then arbitrarily allocated to products or services, typically as a percentage of direct labor or machine hours In such practices, the LSP may be led to a wrong interpretation on how efficient the cost is allocated for the same services delivered to different customers in different service levels. Subsequently, the price may not be quoted in a competitive way because of the distortion of the cost allocation
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