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A cost allocation basis is a strategy used when identifying the most reasonable means of allocating or allocating costs to specific cost objects. A cost object can be a project, a department, or even a role within a department. By creating a viable basis for this expense allocation in a way that conforms to generally accepted accounting principles, it is possible to create a cost allocation basis that takes into account the number of cost objects involved and how certain cost objects should be allocated. types of expenses among these. objects. As with the cost allocation process itself, the goal is not necessarily to allocate specific amounts of costs, but to determine where to allocate these types of costs for best effect.
A cost allocation base can take many different forms. For example, the base may relate to the number of work hours associated with performing a specific function within a department, or possibly the department as a whole. Another approach is to consider the raw materials used in the production of each unit of product produced in accordance with current manufacturing procedures. This type of allocation base may focus on a single Cost Object or include consideration of multiple Cost Objects, depending on the reasons for participating in the Activity.
One of the main benefits of identifying a cost allocation base is that the process helps to better understand the types of costs related to specific activities or functions within the company’s operating structure. The data that is compiled to make use of the database can often help identify areas of the operation where some improvement in overall operational processes could benefit the business over time. From this perspective, a balanced and well-planned cost allocation base serves as a framework for evaluating expenses and allocating them logically.
Using this approach is possible with any type or size of business operation. Smaller businesses can use the process to qualify and assign different expense classes to best effect and use the data to track the costs associated with each phase or object of the transaction. Larger corporations can use the model to identify and understand the processes used to allocate expenses not only to departments but also to each unit within the company structure. The approach is flexible enough to allow the use of a cost allocation base to be adapted to virtually any environment, including a company that operates with domestic and international locations.