Cost allocation is a method to calculate cost of products and services produced for internal and external customers. Cost allocation does not calculate the price of the product or service but calculates the indirect costs associated with the products and services created by the company. Direct costs are costs that are linked to a service category and generally linked to one output category.
Indirect costs are linked to more than one service category and there are also incremental costs which change based on the capacity used or the quantity of output created by the cosmpany. Traditionaly indirect costs are allocated to cost object based on the cost object’s consumption of some measure of activity - usually labor hours. However this approach assumes all overhead is volume related so allocation is based on companywide or departmental rates (this is departmental focus versus busoiness process focus driven by activities).
Traditionally cost allocation is based on costs incurred of cause of the costs. Cost allocation with activity based costing method is based on causal activities - identifying relationships between costs and cost objects which results in better cost allocation.
Cost allocation is a method to calculate cost of products and services produced for internal and external customers. Cost allocation does not calculate the price of the product or service but calculates the indirect costs associated with the products and services created by the company. Direct costs are costs that are linked to a service category and generally linked to one output category. 