Abstract
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.