An empirical evaluation of two joint cost allocation schemes :

Abstract

This study provides empirical evidence on the relative usefulness of two joint cost allocation methods: the net realizable value and the Shapley value allocation schemes, in the context of a decision-making situation. The study evaluated the two allocation schemes with regard to: (1) their effects on divisional managers' pricing decisions and therefore on divisional profits, and (2) the perceived fairness of the cost allocation schemes and whether managers would collaborate more in using the joint facility under one allocation or the other.

This study used a laboratory experiment simulating the pricing decisions for two divisional managers. The experiment was designed to determine whether the different allocation procedures led to different operating decisions. The results of the study suggest that the two allocation schemes are perceived to be equally fair, there is no difference between the two allocation schemes in encouraging managers to use a common facility, and in at least one context, the net realizable value method leads to better pricing decisions. However, in each case, further research is necessary to determine if the results herein are confirmed with different groups of subjects and/or in a different situation.