Cost allocation

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":

1. Cost Center Accounting: Assigning costs to different cost centers to track the cost consumption of specific departments or functions.
2. Cost Object Accounting: Allocating costs to products or projects to determine their profitability.
3. Automated Cost Distribution: Automating the distribution of overhead or fixed costs to various cost centers or cost objects.
4. Recording Internal Allocations: Capturing internal cost allocations to correctly reflect costs between different departments.
5. Reports and Analytics: Generating reports on cost distribution and profitability to support decision-making processes.
6. Integration with ERP Systems: Integration with ERP systems to automatically update accounting data and the operating expense ledger (OEL).
7. Budget Tracking: Monitoring actual costs against the planned budget to identify variances.
8. Project-Level Cost Allocation: Assigning direct and indirect costs to projects to analyze and manage project expenses.

Examples of "cost allocation":

1. Personnel Cost Allocation: Personnel costs are allocated to departments like production or administration.
2. IT Cost Distribution: IT costs are proportionally allocated to various departments utilizing these services.
3. Material Cost Allocation: Material costs are directly assigned to the products being manufactured.
4. Internal Service Billing: One department provides services to another and internally charges the costs.
5. Project-Specific Cost Allocation: Costs for a specific project are tracked and analyzed separately.