Allocation of Fixed Costs in the Presence of Production Trade-offs in Data Envelopment Analysis

Abstract

In this paper, we present a new case for the topic of fixed cost allocation in the presence of production trade-offs in Data Envelopment Analysis (DEA). To this end, we use the principle of unchanged efficiency and propose a fixed cost allocation model in such a way that the efficiency scores of Decision Making Units (DMUs) do not change before and after the allocation of fixed costs. By considering production trade-offs on the input and output components, we incorporate the importance of these inputs and outputs in the fixed cost allocation model. By treating fixed costs as a new input, we incorporate the importance of this new input by defining production trade-offs. According to the proposed fixed cost allocation plan, costs are allocated among efficient and inefficient units. An application of approximation for the data set is employed in the petrochemical industry, and the results of the models are presented.