Allocated Cost Structures to Control Equipment Usage “Bottlenecks”

Abstract

Equipment resource “bottlenecks” arise where demand exceeds a-resource’s ability to provide service. Cost allocation systems which control bottlenecks must reconciles three, often incompatible, objectives — Pareto efficiency, incentive compatibility and information efficiency. This research developes such a cost allocation system where there exists a positive cost of waiting for a resource such as a critical piece of equipment, and a positive benefit to using that resource. This costing approach should be useful in determining internal transfer prices for factory machines or departments whose services must be shared by different operations, and which in the absence of discouragement from a significantly high allocated cost, would tend to be overloaded. This research shows that commonly used cost allocation mechanisms cause resource consumers to underconsume resources, and thus lower efficiency. These problems can compound themselves by misleading management into suboptimal use of equipment in the short run, as well as incorrect acquisition of equipment in the long run.