On Joint Cost Allocation: Independent Cost Proportional Scheme (ICPS) and Its Properties

Situations involving cost-based pricing cannot avoid the issue of joint costs allocation. Accounting literature is filled with alternative joint cost allocation schemes. The Moriarity scheme involves the sharing of cost savings in proportion to independent costs. An alternative scheme for the allocation of joint costs has been developed that uses the same equity principle as the Moriarity scheme. The Independent Cost Proportional Scheme (ICPS) yields core allocations that may not be found in the core when using the Moriarity scheme. The ICPS preserves both the core membership and Moriarity's principle of proportional equity. The ICPS also satisfies the same properties as the Shapley value, excluding ''invariance under strategic equivalence.'' The use of an ICPS will involve a trade-off between the attributes of invariance and the proportional equity. The main consideration of the design of a cost allocation scheme where allocated costs are used in pricing is equity. This consideration is from the points of view of cost centers in the firm as well as the outsiders affected by such allocations. New schemes will continue to be proposed in accounting literature because disagreements exist concerning the meaning of equity.