What are some examples of cost allocation?

What are some examples of cost allocation?

Cost allocation refers to the process of identifying, aggregating, and assigning costs to cost objects. Examples include allocating overhead costs to products, distributing shared service costs among departments, and assigning costs of a project to different departments based on usage.

Can you give me a specific example of how overhead costs are allocated?

Sure! For instance, if a company has $100,000 in overhead costs and produces 10,000 units, it might allocate $10 of overhead to each unit produced. This helps in determining the total cost per unit.

What about service department costs? How are those allocated?

Service department costs can be allocated using methods like direct allocation, step-down allocation, or reciprocal allocation. For example, if the IT department incurs $50,000 in costs, it might allocate those costs based on the number of employees in each department that uses IT services.

Are there any common mistakes in cost allocation?

Yes, common mistakes include failing to accurately identify cost drivers, using arbitrary allocation bases, and not regularly reviewing allocation methods to ensure they remain relevant.