On the interaction between indirect cost allocations and the firm's objectives

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Joyendu Bhadury, Professor, Information Systems and Supply Chain Management (Creator)
The University of North Carolina at Greensboro (UNCG )
Web Site: http://library.uncg.edu/

Abstract: The import of cost allocation procedures are through their ex ante impact on decision making. Hence, it is important that the allocation issue be placed squarely within the context of those firm's objectives which gave rise to the need for the specific allocation. To that effect, this paper focuses the debate on the identification of the indirect cost allocation method that is best suited to the specific reasons for requiring the cost information. First, it is shown that all existing allocation schemes (i) may be expressed in a common equation, flexible enough to be adapted to whatever decision-making purpose the firm desires; and (ii) fulfil the individual rationality conditions of game theory. Then, in light of the controversy as to whether the US Defense Department indirectly subsidizes the commercial side of its suppliers' operations, necessary and sufficient conditions are provided for allocations which do and do not subsidize. Non-subsidized allocations are shown to belong to the core. Subsidized allocations occur when the players (divisions') rational objectives are superseded by higher priority coordinating objectives of non-players (the firm).

Additional Information

European Journal of Operational Research. Vol. 102, pp 445-454. doi:10.1016/S0377-2217(96)00231-7
Language: English
Date: 1997
Cost allocation, Accounting, Core, Inventory, Optimization

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