Allocation Information and Operational Strategies

Abstract

This paper investigates firms' management of reported allocated overhead information and the relationship between operational strategies and overhead costs allocation. Using data from California hospitals for the years 1981–1991, I find that hospitals reallocate more overhead costs to cost-based services when they are subject to a dual payment system featuring both cost-based and fixed-rate payers. This management of reported overhead cost information does not involve a change in real expenses. Furthermore, the evidence also shows that under a dual payment system, hospitals adopt cost-increasing operational strategies, which increase direct costs of cost-based services and then reallocate costs when they have sufficient bargaining power to charge higher prices for their services. When hospitals are not able to negotiate a high price, they control costs while continuing to reallocate overhead costs among services.

Keywords:

• accounting information management
• cost shifting
• operational strategies
• efficiency