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Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.
Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.
The cost allocation system is the process by which we assign indirect costs to cost objects.
The concept of cost object is a useful concept to identify and track costs. A cost object is used to answer the question "how much does something?".
Cost allocation can be seen as the process of identifying and assigning common costs to several cost objects within the organization. Example, allocating electricity cost to various departments within an organization. Thank you.
Thank you Mr. Nadjib Rabahi for your kind invitation. Following is my comment.
Cost allocation is an exercise with an aim to provide Project estimates with regards to the level of detail in design. This exercise is typically conducted before Fundamental design stage concerning the project design is reached in order to affirm investment budget.
Cost allocation puts to test Cost Engineers rate analysis, resident engineers market know-how, Organization's cost data bank and cost modelling & design development process performance. While conducting cost allocation to a particular project model exclusions and inclusions need to be clearly understood in order to examine its relevancy.
Cost allocation system is established catogorically to assure accuracy associated to real-time modifications and revisions in Project costing. For firms with smaller strength this system is available and accessible only with Cost experts.
Manual cost centers
System costs are linked to the administrative organization based at the facility with a clear definition of the powers and responsibilities. Facility should be divided into smaller administrative units called cost centers, so that each administrative unit will be under the responsibility of a particular person can even cost control properly
The cost center is known: that circle certain activity homogeneous or heterogeneous services of a certain type. It contains cost center to a group of similar factors of production results in a distinct product cost center or service distinct measurable
Preparation of cost centers following objectives guide
1. Identify spending and positions of responsibility, including helping to implement the Responsibility Accounting System
2. Survey and measure the actual cost associated with each center of activity centers and then analyze and distribute the load on the cost centers and cost units.
3. Performance evaluation at each of the cost centers and by comparing the actual cost estimated cost for the same position.
Steps for setting up cost centers guide:
1. Identify the different fields of activity (main, sub) in the facility.
2. Study the technical planning of the facility, which shows industrial processes and stages.
3. study the administrative management of the facility in order to determine the powers and responsibilities of each unit.
4. taking into account economic factors, so that does not specify the cost centers on a more detailed basis than they should so as not to lead to beautify established administrative costs are not justified by the results you get.
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.
Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.
Example of Cost Allocation
The African Bongo Corporation (ABC) runs its own electrical power station in the hinterlands of South Africa, and allocates the cost of the power station to its six operating departments based on their electricity usage levels.
Cost Allocation Methods
The very term "allocation" implies that there is no overly precise method available for charging a cost to a cost object, so the allocating entity is using an approximate method for doing so. Thus, you may continue to refine the basis upon which you allocate costs, using such allocation bases as square footage, headcount, cost of assets employed, or (as in the example) electricity usage. The goal of whichever cost allocation method you use is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, an allocation method based on headcount might drive department managers to reduce their headcount or to outsource functions to third parties.
Cost Allocation and Taxes
A company may allocate costs to its various divisions with the intent of charging extra expenses to those divisions located in high-tax areas, which minimizes the amount of reportable taxable income for those divisions. In such cases, an entity usually employs expert legal counsel to ensure that it is complying with local government regulations for cost allocation.
Reasons Not to Allocate Costs
An entirely justifiable reason for not allocating costs is that no cost should be charged that the recipient has no control over. Thus, in the African Bongo Corporation example above, the company could forbear from allocating the cost of its power station, on the grounds that none of the six operating departments have any control over the power station. In such a situation, the entity simply includes the unallocated cost in the company's entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost.
Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company.Allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the allocation. Efforts have been made over the years to improve the bases for allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hours to machine hours to activity based costing. The goal is to allocate or assign the costs based on the root causes of the common costs instead of merely spreading the costs.
the cost allocation system is based on the cost pool where all the simillar costs are gathered then we find out what is the cost drive for each pool and at last we allocate it to the cost objective on a particular base.
it is used when we can't track the cost to a specific cost objective.
The system through which cost is allocated to different projects, jobs or cost center.
Some companies have work based structure or WBS, the cost is allocated to the respective cost head along with a WBS which further categories it as per management requirement.
for example:
1- Lease of equipment is a cost head
a. WBS Civil Works
b. WBS Mechanical Works
c. WBS Up gradation of an Asset
d. WBS Back charge to client
e. etc
Cost allocation refers to allocate a cost which is common overhead best is based on Manhours Productivity and Production
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department
Cost allocation is the dividing of a particular cost to different cost centres to know the cost centre profit /loss or in otherwords to measure the micro efficiency of individual divisions or sections of a company's total profitability or successful functioning. If cost centre allocation is introduced, the negative aspects or cost factor in that division can be rectified immediately otherwise the profitability of one cost centre/division would be covered by another that will ultimately reduce the overall efficiency of the company.
