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Cost Allocation Revisited: An Optimality Result

Author

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  • Seungjin Whang

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

The resource manager of a firm is faced with capacity and pricing decisions with regard to a congestion-prone system such as computer/communication facilities. Difficulties arise since the manager is uninformed of the system demand when the capacity decision is to be made. A game-theoretic model is developed to analyze the effects of different accounting rules on the elicitation of relevant information and ex-post efficiency in acquisition and allocation decisions. The key result is that the cost allocation method (aided by an anonymous reporting scheme) is indeed, as asserted by Zimmerman (Zimmerman, J. 1979. The costs and benefits of cost allocations. Accounting Rev. 54(July) 504--521.), a full-information-efficient rule achieving optimality both in acquisition and allocation decisions. Discussions of the main assumptions underlying this result are provided.

Suggested Citation

  • Seungjin Whang, 1989. "Cost Allocation Revisited: An Optimality Result," Management Science, INFORMS, vol. 35(10), pages 1264-1273, October.
    • Handle: RePEc:inm:ormnsc:v:35:y:1989:i:10:p:1264-1273
    DOI: 10.1287/mnsc.35.10.1264
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    Citations

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    Cited by:

    1. Pangburn, Michael S. & Stavrulaki, Euthemia, 2008. "Capacity and price setting for dispersed, time-sensitive customer segments," European Journal of Operational Research, Elsevier, vol. 184(3), pages 1100-1121, February.
    2. Balachandran, Kashi R. & Radhakrishnan, Suresh, 1996. "Cost of congestion, operational efficiency and management accounting," European Journal of Operational Research, Elsevier, vol. 89(2), pages 237-245, March.
    3. Stephen C. Hansen & Robert P. Magee, 1993. "Capacity Cost and Capacity Allocation," Contemporary Accounting Research, John Wiley & Sons, vol. 9(2), pages 635-660, March.
    4. van Ackere, Ann, 1996. "The management of congestion," European Journal of Operational Research, Elsevier, vol. 89(2), pages 223-225, March.
    5. Lynn, Stephen & Balachandran, Kashi R., 2007. "Allocating costs of a shared server with stochastic service parameters and job class priorities," European Journal of Operational Research, Elsevier, vol. 180(3), pages 1155-1167, August.
    6. Radhakrishnan, Suresh & Balachandran, Kashi R., 1995. "Stochastic choice hazard and incentives in a common service facility," European Journal of Operational Research, Elsevier, vol. 81(2), pages 324-335, March.
    7. Raja Nadiminti & Tridas Mukhopadhyay & Charles H. Kriebel, 2002. "Research Report: Intrafirm Resource Allocation with Asymmetric Information and Negative Externalities," Information Systems Research, INFORMS, vol. 13(4), pages 428-434, December.
    8. V.G. Narayanan & Ratna G. Sarkar, 2002. "The Impact of Activity‐Based Costing on Managerial Decisions at Insteel Industries—A Field Study," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(2), pages 257-288, June.
    9. Radhakrishnan, Suresh & Balachandran, Kashi R., 2004. "Service capacity decision and incentive compatible cost allocation for reporting usage forecasts," European Journal of Operational Research, Elsevier, vol. 157(1), pages 180-195, August.
    10. M. Gietzmann & A. Ostaszewski, 1996. "Optimal Disbursement of a Sunk Resource and Decentralised Cost Allocation," Accounting and Business Research, Taylor & Francis Journals, vol. 27(1), pages 17-40.
    11. Wang, E. T. G., 2000. "Information and incentives in computing services supply: The effect of limited system choices," European Journal of Operational Research, Elsevier, vol. 125(3), pages 503-518, September.
    12. Sumita, Ushio & Masuda, Yasushi & Yamakawa, Shigetaka, 2001. "Optimal internal pricing and capacity planning for service facility with finite buffer," European Journal of Operational Research, Elsevier, vol. 128(1), pages 192-205, January.
    13. Chun (Martin) Qiu & Wenqing Zhang, 2016. "Managing long queues for holiday sales shopping," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 15(1), pages 52-65, February.

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