Fixed cost allocation considering the input-output scale based on DEA approach

Abstract

As independent and decentralized entities often share common resources, it is necessary to allocate common costs across these subunits. When there is a lack of specific price information, data envelopment analysis (DEA) approaches have been successfully used to resolve fixed cost allocation problems. To this end, this paper develops a fixed cost allocation scheme based on decision-making unit (DMU) input–output scales that considers both the input consumption and output production scales. The allocation scheme is derived from a one-dimensional case to a general case, in which the input–output scale is calculated based on a common set of weights (CSW) determined using a DEA approach. The proposed method is demonstrated using a classical numerical example from the prior literature and an empirical application that has been applied in previous studies, from which it is found that the fixed cost allocation scheme is more acceptable to the involved DMUs.