Cost Allocation in Accounting
Cost allocation refers to assigning a particular price on a cost object which may include a product, service or department. It is a crucial element of accounting. It helps to effectively and efficiently manage a business. It is vital in planning, making decisions and for measuring the inventory costs. For any business venture to be successful, there must be adequate planning and resource allocation to the various departments. This will require a budget to be formed that contains all the expenditure of that business. Cost allocation will enable the managers of the company to determine which department requires what amount of funds and hence, ensure adequate distribution to all the departments. This will reduce the wastage of resources and ensure that they are appropriately managed. With this information, the managers can determine how to increase the profitability of their business by reducing unnecessary expenditure and increasing the profit margins. Cost allocation is also vital in measuring the inventory cost of the organization. The business managers can, therefore, determine how much money has been spent on the acquisition of the products they are selling (Grytz & Krohn-Grimberghe, 2017)
Cost allocation is necessary for a joint process for purposes of financial reporting and determining the price of various commodities. To develop an excellent financial account report, all the details of the expenditure and allocation must be written down. Allocating costs and developing a budget makes the process of financial reporting more straightforward. Cost allocation is also useful in pricing commodities. After calculating the total expenditure plus the inventory cost, the business owner will determine the price the products should be sold to make a profit. Hence, cost allocation is crucial in the joint process (Wilkinson, 2020).
Joint products are two or three products that can be manufactured simultaneously from the same production process. For example, one can get cheese, ghee and butter from processing milk and kerosene and gas from processing crude oil. An example of a by-product is buttermilk derived from the processing of butter (Wilkinson, 2020).
In conclusion, cost allocation is crucial for the management of any business enterprise. It helps in planning, decision making, and measuring the cost of inventories. In a joint process, cost allocations improve financial reporting and aid in the pricing of the commodities.
Reference
Grytz, R., & Krohn-Grimberghe, A. (2017). Service-Oriented Cost Allocation for Business Intelligence and Analytics. International Journal Of Systems And Service-Oriented Engineering, 7(2), 40-57. doi: 10.4018/ijssoe.2017040103
Wilkinson, J. (2020). Joint Costs Definition | Joint Costs Allocation • The Strategic CFO. Retrieved 12 April 2020, from https://strategiccfo.com/joint-costs/