An allocation base is the basis used to subdivide items among a group of similar items. There may be a single rule to allocate the total among the group of similar items or there may be a set of rules used to divide the total amount to the different group members. Traditionally, a single rule is used in cost-based accounting, and multiple rules are used in activity-based accounting. Each organization determines the way it will implement its allocation base.
The types of rules to be used in an allocation base differ based upon the industry and the application for which the allocation will occur. In financial accounting, the allocation rules might be specified by generally accepted accounting practices in a given jurisdiction. Activity-based accounting might be granted more freedom with the manner in which an allocation is completed so long as its implementation follows generally accepted practices in the industry. Each industry may set standards for how an allocation base is determined as well as who has the right to set the allocation basis.
Some industries may have products from multiple owners passing through one location. At this location, the company responsible for measuring product volume is responsible for allocating the volume of product among the different owners. The system operator, the party taking delivery of the product, or generally accepted practices may designate the allocation base for that specific location.
In a financial accounting situation, the generally accepted accounting practices set the parameters for how an allocation base may be completed. For instance, the first product into the system may receive its portion first. Alternatively, the last product into the system might receive an allocation first, or all of the products within the system may receive a pro-rated portion of the volume available.
Within a natural gas pipeline, the allocation basis at each of its receipt and delivery points may be set differently. A party making delivery of natural gas to the pipeline may determine the allocation scheme for the individual accounts at the receipt point into the pipeline. The delivery party might determine this scheme based upon the price each of the parties has paid to the natural gas producer. A utility company receiving gas from the pipeline as it leaves the pipeline’s system usually sets the allocation scheme for that location. The utility company might set its allocation base using its tariff’s class of service as the basis for how the gas is allocated among the parties receiving gas at its entry point.