What Is a Cost Allocation Base?

Malcolm Tatum

A cost allocation base is a strategy that is used while identifying the most reasonable means of assigning or allocating cost to specific cost objects. A cost object may be a project, a department, or even a function within a department. By creating a workable base for this assignment of expenses in a fashion that is in keeping with generally accepted accounting principles, it is possible to create a cost allocation base that takes into account the number of cost objects involved and how certain types of expenses are to be allocated among those objects. As with the process of cost allocation itself, the object is not necessarily to assign specific amounts of costs but to determine where to allocate those cost types to best effect.

Businessman with a briefcase
Businessman with a briefcase

A cost allocation base can take on a number of different forms. For example, the base may have to do with the number of labor hours associated with the performance of a particular function within a department, or possibly the department as a whole. Another approach is to consider the raw materials utilized in the production of each unit of product produced under current manufacturing procedures. This type of allocation base may focus on a single cost object or include consideration of multiple cost objects, depending on the reasons for engaging in the activity.

One of the chief benefits of identifying a cost allocation base is that the process helps to provide greater understanding into the types of costs involved with specific activities or functions within the company’s operational structure. The data that is compiled in order to make use of the base can often help identify areas of the operation in which some improvement in the general operational processes could benefit the business over time. From this perspective, a balanced and well-planned cost allocation base serves as the framework for evaluating expenses as well as assigning them in a logical manner.

Using this approach is possible with any type or size of business operation. Smaller companies can use the process to qualify and assign different classes of expenses to best effect and use the data to track the costs associated with each phase or object of the operation. Larger corporations can use the model to identify and understand the processes used to allocate expenses to not only departments but also to each facility within the company structure. The approach is flexible enough to allow the use of a cost allocation base to be adapted to just about any setting, including a company that operates with both domestic and international locations.

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