Cost allocation base can be defined as a factor that is the common denominator for systematically linking a cost or group of costs to a cost object such as a department or an activity. Where cost object is a product, the narrower term cost application base is often used.
Cost Allocation Base FAQs
A cost allocation base is the unit, activity, or item that allocates costs in an organization. It can be used to measure and assign expenses to departments and activities accurately.
Costs are assigned to the appropriate department or activity based on the number of units of a resource consumed by each respective department or activity, such as labor hours or machine hours. The total amount of expenses for the period is then divided among the various departments and activities based on their usage patterns.
Most variable costs associated with production processes can be allocated using a cost allocation base, such as direct materials, wages and salaries, utilities, machinery, and equipment rental costs.
Using a cost allocation base enables organizations to identify areas where costs can be reduced or controlled more efficiently. It also helps allocate accurate costs for each department or activity and provides the necessary data for pricing products and services accurately.
Organizations should review their cost allocation bases regularly to ensure accuracy in allocating expenses. The frequency will depend on the size of the organization and how quickly resource consumption patterns change within that organization. Generally speaking, it is recommended to update your cost allocation base at least once a year.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
