The use of funding/allocation formulas in public higher education and the efficacy of Higher Education General Information Survey (HEGIS) taxonomies as the basis for discipline cost differentials in Tennessee are examined. Major criteria on which funding/allocation formulas should be based and weaknesses in existing formulas are also identified. Attention is focused on funding formulas employed in the Southern Regional Education Board states, including student credit hours or full-time equivalence, workload factors, costs, student level, discipline, method of instruction, and type of institution. Data from a 1981 Tennessee Cost Study were used to test the efficacy of using HEGIS taxonomies in budget formulas. Each class or department was identified as a cost center from which instructional costs were derived by HEGIS taxonomy and level. It is sggested thgt ideally formulas should be based on standardized workload measures that reflect the resource requirements for the attainment or maintenance of the level of quality specified in institutional missions. It is concluded that the HEGIS taxonomies were not designed for measurement of costs or workloads and are inappropriate bases for this purpose. Data from the 1981 Tennessee Cost Study are included. (SW)