Cost allocation

Cost allocation is the process of distributing indirect costs to products, jobs, or departments using a chosen driver, because those costs benefit more than one cost object and cannot be directly traced.

Also known asoverhead allocation

ByHoang TruongUpdated June 30, 2026

See it move

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A segmented bar shows factory rent of €90,000 divided between two departments using floor area as the allocation base. Machining occupies 600 m² (60% of total space) and is charged €54,000, whilst Assembly occupies 400 m² (40%) and receives €36,000. The example illustrates the principle that indirect costs should be spread across cost objects using a base that reflects the activity or resource that actually drives each cost.

Where it fits

SubjectCost AccountingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

AR = \frac{\text{Total indirect cost}}{\text{Total allocation base}}

Variables

$A R$: allocation rate (cost per unit of base) (€ per base unit)
$T o t a l in d i r ec t cos t$: cost pool to be distributed (€)
$T o t a l a l l oc a t i o nba se$: total quantity of the chosen driver across all cost objects (base units)

LaTeX

\text{Allocated cost} = AR \times \text{usage}

Variables

$A R$: allocation rate (€ per base unit)
$u s a g e$: cost object's actual consumption of the allocation base (base units)