Cost allocation assigns costs to specific units within an organization, aiding in tracking expenses for budgeting and tax purposes. It is used by companies, non-profits, and families.
Cost allocation is the process of identifying and allocating the costs of services necessary for running a business or other type of entity. Unlike a cost classification, an allocation is less concerned with the actual cost amount and more concerned with allocating or assigning the cost to the correct unit within the organization. From this point of view, cost allocation can be seen as a tool that helps to track all costs associated with the current operation more efficiently, since each cost is associated with specific departments or groups of departments all within the organization.
A simple example of cost allocation would be the wages or salary of an employee assigned to work in a specific department. In a hospital, a nurse is normally assigned to a specific wing or floor, with costs assigned to that unit’s overall operation. As long as the nurse continues to work her assigned shift within that unit, the salary and benefits accrued are associated with that unit. However, if the nurse is called upon to fill out another plan or unit, such as spending a full shift in the emergency department, the salary and benefits earned for that time period may very well be assigned to the unit where the nurse worked. functioned, instead of its permanent wing or plan.
There are several reasons why cost allocation is important. One has to do with accurately allocating costs within an organization so that it is possible to know exactly what types of costs have been incurred in operating a particular area within the organization. This is not only important information to consider when creating an operating budget, but it is also vital in calculating the taxes that must be paid to local, state and federal tax agencies. In a number of countries around the world, how costs are allocated can have an impact on how much the organization pays in taxes, necessitating compliance with any government regulations that have to do with cost allocation within the organisation.
Another benefit of cost allocation has to do with simply tracking expenses for internal planning purposes. While some expenses are indirect costs and benefit more than one area of the operation, it is still necessary to allocate direct costs logically and accurately. Even when costs are incremental, meaning they span multiple accounting periods, making sure costs are allocated correctly can make a big difference in how each unit within the business or other entity works within its share of the overall budget. When it is clear that a unit will exceed its allocated budget, steps can be taken to implement non-essential service cost cuts while finding ways to adjust the overall budget to allow for continued support of essential functions.
Organizations of all types and sizes engage in the task of cost allocation. Companies use this strategy as a tool for planning and maintaining a budget. Non-profit entities use the tool as a way to provide as many services as possible to its members, while still making more effective use of its resources. Families can also use the concept of cost sharing when planning the operating budget for the family. As a means to correctly identify and allocate costs, this approach to cost allocation helps provide thought and structure to financial planning in a way that would otherwise be extremely difficult.
Protect your devices with Threat Protection by NordVPN
