What is the concept of cost allocation in accounting?

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by jaron , in category: Taxation and Accounting , 9 months ago

What is the concept of cost allocation in accounting?

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1 answer

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by mikel , 9 months ago

@jaron 

Cost allocation is a process in accounting where costs are assigned or distributed to particular cost objects such as products, services, or departments. It is based on the idea that costs incurred by an organization should be allocated to various cost objects in order to accurately determine the total cost associated with each object.


The purpose of cost allocation is to enable accurate measurement and reporting of costs to aid in decision making, performance evaluation, and pricing. It helps in understanding the profitability and cost-effectiveness of different products, services, or divisions.


There are various methods of cost allocation, including direct allocation, step-down allocation, and reciprocal allocation. Direct allocation assigns costs directly to cost objects if they are directly traceable to them, such as direct labor or direct materials. Step-down allocation involves allocating costs first to some specific cost objects and then to other objects in a sequential manner. Reciprocal allocation is used when costs are incurred by multiple cost objects and need to be allocated based on the interdependencies between them.


Overall, cost allocation ensures that all costs are properly assigned to cost objects to provide accurate financial information for decision making and performance evaluation.