The End of Cost Allocations as We Know Them

Cost allocation issues have befuddled management around the world for over a century. And, because of "informational asymmetries" and agency conflicts between operating management and headquarters, there is no clear theoretical solution to the problem. Nevertheless, there are good reasons for allocating costs. If properly structured, transfer-pricing schemes can serve the same purpose as a market price. By communicating useful information about the relative scarcity of resources within an organization, they can serve to balance supply and demand for the product or service being priced. 1997 Morgan Stanley.