What is a cost allocation plan?

• A cost allocation plan is a written summary which shows how an organization allocates costs. between two or more programs. • An organization often has several allocation plans based on type of expenditure or how the. expenditure is being used.

What is the meaning of cost allocation?

Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main corporate office but allocated to different branches or departments.

How do I make a cost allocation plan?

Basic Steps of Cost Allocation

  1. Identify shared facilities or support services.
  2. Identify the costs to be allocated.
  3. Determine the allocation factors/methodology to distribute the costs equitably.
  4. Allocate the costs.
  5. Update and monitor the data and methodology to ensure the allocation remains fair and equitable over time.

What is the purpose of cost allocation?

Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough to justify the costs allocated.

What are the three cost allocation methods?


There are three methods commonly used to allocate support costs: (1) the direct method; (2) the sequential (or step) method; and (3) the reciprocal method.

What are the four steps in the cost allocation process?

There are four major steps to allocating expenses:

  1. Determine program services and supporting activities. …
  2. Determine direct and indirect expenses. …
  3. Determine proper allocation methods for indirect expenses. …
  4. Apply allocation methods to indirect expenses.

What is an example of allocation?

1. Allocation is defined as the act of being portioned out for a certain reason. An example of allocation is when one refers to how the school fund-raising money is to be used for new computers. noun.

How do you allocate costs?

How to allocate costs

  1. Identify your chosen cost object. To allocate costs, begin by deciding which cost objects you want to connect with specific costs. …
  2. Accumulate associated costs. …
  3. Choose a cost allocation method. …
  4. Perform your calculations.

How do you determine allocation cost?

If the auditor’s cost is based on the Total Revenue of the organization, then you would divide the total revenue of this program by the total organizational revenue, to calculate the allocation percentage for that cost.