Joint Cost Allocation and Cogeneration

25 Pages Posted: 30 Mar 2014

See all articles by Conny Overland

Conny Overland

University of Gothenburg, Department of Business Administration

Anders Sandoff

Göteborg University - School of Business, Economics and Law

Date Written: January 31, 2014

Abstract

With the joint production of two goods, one subject to competition and the other being a natural monopoly, the threat of cost based price regulation should lead the rational producer to allocate as much costs as possible to the product under scrutiny. We investigate whether Swedish district heating companies allocate joint costs accordingly as well as the importance of these choices in terms of reported segment profitability. The study is conducted through telephone interviews with Swedish companies with combined heat and power (CHP) production, and by analyzing effects on segment profitability from different allocation policies in a DH firms. Our main findings are that most CHP producers do not allocate costs for purposes of reporting or decision making, but that they, implicitly or explicitly, consider electricity a by-product which is used to subsidize heat customers. The case study also suggests that the choice of allocation method has a substantial impact on reported business segment profitability.

Keywords: Joint cost allocation, Mark-up pricing, District heating, Combined heat and power, Cogeneration, Sweden

JEL Classification: L10, L52, L97, M11, M40

Suggested Citation

Overland, Conny and Sandoff, Anders, Joint Cost Allocation and Cogeneration (January 31, 2014). Available at SSRN: https://ssrn.com/abstract=2417324 or http://dx.doi.org/10.2139/ssrn.2417324

Conny Overland (Contact Author)

University of Gothenburg, Department of Business Administration ( email )

Göteborg, SE 405 30
Sweden
+46-31-786 12 72 (Phone)
+46-31-786 44 92 (Fax)

Anders Sandoff

Göteborg University - School of Business, Economics and Law ( email )

Vasagatan 1
Goteborg, 40530
Sweden

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