Journal of Applied Mathematics and Decision Sciences
Volume 2005 (2005), Issue 3, Pages 137-147

Reciprocal service department cost allocation and decision making

Franklin Lowenthal and Massoud Malek

California State University, Hayward 94542, CA, USA

Received 12 June 2001; Revised 10 August 2004

Copyright © 2005 Franklin Lowenthal and Massoud Malek. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


In a manufacturing company, certain departments can be characterized as production departments and others as service departments. Examples of service departments are purchasing, computing services, repair and maintenance, security, food services, and so forth. The costs of such service departments must be allocated to the production departments, which in turn will allocate them to the product. It is known that one can view the cost allocation problem as an absorbing Markov process, with the production departments as the absorbing states and the service departments as the transient states. Using Markov analysis, we will show that this yields additional insight into the underlying concept of reciprocal service department cost allocation by proving that the “full service” department costs can be used to determine the price that should be paid to an external supplier of the same service currently supplied by the service department.