Related: A Guide to Traditional Costing Systems Types of allocated costs Individual business units can then use this information to make important business decisions. This can distribute responsibility for spending and expenses equitably across parts of an organization. To make a connection between a cost and its cost object, you can choose a cost object, identify the associated costs and record them in a way that's useful for your company's objectives.Ĭost allocation helps determine which parts of a business are responsible for which costs. A cost object can be a specific product or product line, a particular service you offer, a production-related activity or a department or division in your company. What is cost allocation?Ĭost allocation is the process of identifying, accumulating and assigning costs to specific cost objects. In this article, we define cost allocation, explain some types of allocating costs and provide steps for how to distribute these kinds of prices.
Understanding what cost allocation is can help managers and other leaders have a more comprehensive overview of an organization's financial situation and make informed decisions in areas like job bidding, motivational strategies and purchasing activities.
When a business leader can connect a cost to a specific, tangible item, they can allocate or assign it to a certain department or division. Business leaders can make effective decisions when they have access to factual data regarding costs.
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