EconPapers    
Economics at your fingertips  
 

On the allocation of overhead costs

Dieter Pfaff

European Accounting Review, 1994, vol. 3, issue 1, 49-70

Abstract: This paper analyses optimal overhead allocation in a simple one-period setting with several divisions (production, sales or service departments). At the begin-ning of the period, headquarters has to decide on the procurement of a common input. The divisions possess private information on their respective marginal profit expectations of the common input. The objective of headquarters is to determine the most efficient overhead allocation mechanism. Different mechan-isms are compared. The conclusion is that the non-allocation of the common costs leads to a presentation of excessive profit expectations by the divisional managers and will thus induce an overinvestment in the common input. The Groves scheme prevents such a misallocation of resources only if collusion is precluded. In contrast, full-cost allocation leads to the first-best solution if allocation is based on a measure that ideally approximates the divisions' pro-portion of marginal profitability of the input. Thus, in the case of homogeneous divisions which benefit equally from the common input an equal allocation is optimal. In the case that divisions with higher profits benefit more from a common input, the allocation of overhead costs according to the divisional profits observable at the end of the period ('ability-to-bear' principle) can be optimal.

Date: 1994
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09638189400000003 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:euract:v:3:y:1994:i:1:p:49-70

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REAR20

DOI: 10.1080/09638189400000003

Access Statistics for this article

European Accounting Review is currently edited by Laurence van Lent

More articles in European Accounting Review from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2025-03-20
Handle: RePEc:taf:euract:v:3:y:1994:i:1:p:49-70