Cost Allocation as a Coordination Mechanism

CentER Discussion Paper No. 2003-128

25 Pages Posted: 21 Jun 2004

See all articles by Khaled Diaw

Khaled Diaw

Tilburg University - Center for Economic Research (CentER)

Date Written: 2003

Abstract

This paper shows that cost allocation can endogenously arise as a coordination mechanism in a decentralized firm. This result is derived in a setting with multiple (internally supplied) resources shared by multiple users, which constitutes a departure from previous literature. While standard cost allocation procedures use one allocation base, the optimal cost allocation mechanism derived here can select many allocation bases, therefore, providing support for the use of Activity Based Costing. Like the cost allocation itself, the selection of allocation bases also arises endogenously.

Keywords: Cost allocation, pricing, decentralization, activity based costing

Suggested Citation

Diaw, Khaled, Cost Allocation as a Coordination Mechanism (2003). CentER Discussion Paper No. 2003-128, Available at SSRN: https://ssrn.com/abstract=556970 or http://dx.doi.org/10.2139/ssrn.556970

Khaled Diaw (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 0 13 466 3339 (Phone)
+31 0 13 466 8001 (Fax)