Reliability should be done from the initial stage of development to secure performance and safety of system. To establish and achieve target reliability of a system, reliability should be allocated into the subsystems. In the acquisition and development of a system, frequent failures will cause a negative effect on performing mission and occurs increasing operating cost. This study reviewed and evaluated the existing reliability allocation models using operation and maintenance costs to find the correlation between reliability allocation models and its operating cost. A target system reliability on the diesel engine to be developed for naval vessels is allocated into its subsystem based on the existing reliability allocation models. A selection methodology for reliability allocation models was made to minimize operating cost by using simulation based on the given operating diesel engine data for naval vessels.