Cost Allocation Methods

Cost allocation methods are techniques used by organizations to distribute shared expenses—like rent, utilities, or salaries—among different departments, products, or projects. These methods aim to assign costs fairly and accurately based on how much each area uses or benefits from the shared resources. Common approaches include direct allocation, where costs are assigned directly, and activity-based costing, which assigns costs based on activities that drive expenses. Proper allocation helps organizations understand true profitability and make informed decisions about pricing, budgeting, and resource management.