Costingis one of the key practices in every organization as differentapproaches are deployed in the process. This brings out the practiceof cost allocation which is referred in many organizations as theprocess of identifying aggregating as well as assigning costs to thecost objects (any activity that is undertaken for the separation ofcosts such as a product, or customer) (Zimmerman, 2014). Costallocation comes in different approaches which entail reciprocal,step down, and direct method.
Thecost allocation process is undertaken in three major steps. The firststep is the Identification of the Cost Objectives. This means to whatthe process is being focused upon. The second step entails Formationof Cost Pools and thirdly is the Selection of an Allocation base thatis directed at relating the cost pools identified above to the costobjectives (Guajardo & Rönnqvist, 2015).
Reasonsfor using cost allocations
Theallocating cost in every business is an important task. Withdifferent causes of costing in a business, different reasons are asto why cost allocation is an important process/exercise. One majorreason is that it provides accurate cost, which in turn improvesorganizations, financial reporting and improves decision making(Zimmerman, 2014). Additionally, it also enhances resource usage,helps in controlling limited resources, and, in turn, another keyreason why cost allocation is undertaken (Guajardo & Rönnqvist,2015).
Despitethe merits that come with the use of cost allocation in businessmanagement, at times, it might not be appropriate to use the costallocation. When the cost isn’t the primary determinant of theprice of a commodity or the operations of in an organization, thenthe application of the cost allocation is not a must. In addition,when accuracy is required when determining the cost, then costallocation practices may fail to be deployed (Zimmerman, 2014). Costallocation is an integrated process which despite its shortcomingsremain an integral part of the business operation and management.
Guajardo,M., & Rönnqvist, M. (2015). Cost allocation in inventory poolsof spare parts with service-differentiated demandclasses. InternationalJournal Of Production Research, 53(1),220-237.
Zimmerman,Jerold L., (2014). Accounting for Decision Making and Control. 8thedition. McGraw Hill, Irwin, CA.