Allocation of shared costs among decision making units: a DEA approach

Authors:
Wade D. Cook;Joe Zhu
Affiliations:
Schulich School of Business, York University, 4700 Keele Street, Toronto, Ont., Canada M3J 1P3;Department of Management, Worcester Polytechnic Institute, Worcester, MA
Venue:
Computers and Operations Research
Year:
2005

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Abstract

An issue of considerable importance, both from a practical organizational standpoint and from a costs research perspectives, involves the allocation of fixed resources or costs across a set of competing entities in an equitable manner. Cook and Kress (Eur. J. Oper. Res. 119 (1999) 652) propose a data envelopment analysis (DEA) approach to obtain a theoretical framework for such cost allocation problems. Their approach cannot be used directly to determine a cost allocation among the decision making units (DMUs), but rather to examine existing costing rules for equity. The current paper extends the Cook and Kress (Eur. J. Oper. Res. 119 (1999) 652) approach, and provides a practical approach to the cost allocation problem. It is shown that an equitable cost allocation can be achieved using DEA principles.