What is meant by Cost allocation?
The term "cost allocation" refers to the process of distributing costs within a company to different cost centers or cost objects to allow for an accurate assignment of expenses. This is a fundamental part of internal accounting and is used to determine the profitability of products, departments, or projects.
Typical software functions in the area of "cost allocation":
- Cost Center Accounting: Assigning costs to different cost centers to track the cost consumption of specific departments or functions.
- Cost Object Accounting: Allocating costs to products or projects to determine their profitability.
- Automated Cost Distribution: Automating the distribution of overhead or fixed costs to various cost centers or cost objects.
- Recording Internal Allocations: Capturing internal cost allocations to correctly reflect costs between different departments.
- Reports and Analytics: Generating reports on cost distribution and profitability to support decision-making processes.
- Integration with ERP Systems: Integration with ERP systems to automatically update accounting data and the operating expense ledger (OEL).
- Budget Tracking: Monitoring actual costs against the planned budget to identify variances.
- Project-Level Cost Allocation: Assigning direct and indirect costs to projects to analyze and manage project expenses.
Examples of "cost allocation":
- Personnel Cost Allocation: Personnel costs are allocated to departments like production or administration.
- IT Cost Distribution: IT costs are proportionally allocated to various departments utilizing these services.
- Material Cost Allocation: Material costs are directly assigned to the products being manufactured.
- Internal Service Billing: One department provides services to another and internally charges the costs.
- Project-Specific Cost Allocation: Costs for a specific project are tracked and analyzed separately.
