A fixed cost allocation based on the two-stage network data envelopment approach

The conventional paradigm of resource allocation model in single-stage data envelopment analysis (DEA) assumes that no internal structure is in production process. However, this paradigm does not consider that subunits may jointly use some fixed inputs from their organization, hence the importance of allocating fixed costs among subunits. Furthermore, in the fixed cost allocation problem, many studies use conventional DEA principles and produce self-evaluation efficiency scores. However, fixed cost allocation may contribute to each of sub-processes simultaneously. This study proposes an alternative approach to fixed cost allocation based on the two-stage network DEA (NDEA) and the concept of cross-efficiency. The study presents a numerical example to illustrate the applicability of the method. The results show that if two decision-making units (DMUs) have similar output profiles, the DMU with higher input values receives less fixed cost, whereas if two DMUs have similar input profiles, the DMU with higher output values receives more fixed cost. This study contributes in creating a novel approach to show how to allocate adequately the fixed cost to all DMUs when considering efficiency.