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

An issue of considerable importance, both from a practical organizational standpoint and from a costs research perspective, involves the allocation of fixed resources or costs across a set of competing entities in an equitable manner. Cook and Kress 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 approach, and provides a practical approach to the cost allocation problem. It is shown that an equitable allocation can be achieved using DEA principles.