On the interaction between indirect cost allocations and the firm's objectives |
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| Affiliation: | 1. The University of North Carolina at Greensboro, USA;2. TechXponent, Newark, DE, USA;1. University of North Carolina Greensboro, PO Box 26170, Greensboro, NC 27402, United States;2. The University of Texas at Arlington, 701 S West St, PO Box 19437 Arlington, TX 76019, United States;3. The University of Texas at Arlington, 701 S West St, PO Box 19479 Arlington, TX 76019, United States;1. College of Mechanical and Vehicle Engineering, Chongqing University, Chongqing, China;2. Adam Smith Business School, University of Glasgow, Glasgow, UK;3. Institute of Innovation and Circular Economy, Asia University, Taichung, Taiwan;4. Department of Medical Research, China Medical University Hospital, Taichung, Taiwan;5. School of Software, Tsinghua University, Beijing, China;1. Division of Hospital Medicine, Denver Health, Denver, CO;2. Division of General Internal Medicine, University of Colorado Anschutz Medical Campus, Denver, CO;3. Office of Research, Denver Health, Denver, CO;4. Institute for Health Research, Kaiser Permanente Colorado, Denver, CO;5. Division of Renal Diseases and Hypertension, University of Colorado Anschutz Medical Campus, Denver, CO |
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| Abstract: | The import of cost allocation procedures are through their ex ante important 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 Subsidized allocations occur when the players (divisions') rational objectives are superseded by higher priority coordinating objectives of non-players (the firm). |
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