Allocations and the Validity of the Incremental Principle

Abstract

Abstract The proposition that common costs need to be allocated for the purpose of investment decision making is examined. Allocation is, in practice, frequently carried out in order to assist in long-run decision making. The theoretical arguments against allocation are, it is argued, invalid. Legitimacy of allocation does not imply, however, that incremental analysis needs to be abandoned or modified. The available evidence suggests that fully allocated cost is likely to be a good estimate of long-run incremental cost.