Cost Allocation in Manufacturing–Remanufacturing Operations
Article first published online: 15 MAR 2011
© 2011 Production and Operations Management Society
Production and Operations Management
Volume 20, Issue 6, pages 841–847, November/December 2011
How to Cite
Toktay, L. B. and Wei, D. (2011), Cost Allocation in Manufacturing–Remanufacturing Operations. Production and Operations Management, 20: 841–847. doi: 10.1111/j.1937-5956.2011.01236.x
- Issue published online: 15 NOV 2011
- Article first published online: 15 MAR 2011
- History: Received: January 2005; Accepted: July 2010 by Luk van Wassenhove, after 5 revisions.
- cost allocation;
- transfer prices;
- closed-loop supply chain;
- sustainable operations
For firms remanufacturing their products, the total life-cycle costs and revenues from new and remanufactured products determine their profitability. In many firms, manufacturing/sales and remanufacturing/remarketing operations are carried out in different divisions. Each division is responsible for only part of the product's life cycle. Practices regarding transfer pricing across divisions vary significantly among companies, affecting the life-cycle profit performance of the product. In this research, we identify characteristics of transfer prices that achieve the firm-wide optimal solution. To this end, we consider a manufacturer who also undertakes remanufacturing operations and we focus on price (quantity) decisions. We determine that a cost allocation mechanism that allocates a portion of the initial production cost to each of the two stages of the product life cycle should be used. We also conclude that cost allocation should be implemented as a fixed cost allocation, where charges to the remanufacturing division should be determined independently of the actual quantity of units remanufactured.