Naufal Hanif Zulfikar

16/397055/EK/21011
Summary
Cost Allocation

There are four basic elements in a cost allocation: cost objects, cost items, cost pools, and
cost allocation bases. Cost object is simply that which you are estimating the cost of. Cost item is
the resource that is used for a cost object. Cost pool is like a bucket in which cost items are
accumulated before being allocated to cost object. There are two types of cost pools: mission
centers and support centers. Mission centers are cost pools that produce final product. Support
centers are cost pools that exist solely to support other departments or cost pools. Cost allocation
base is the criterion used to allocate indirect costs to object costs and cost allocation base can
provide a good estimate of the indirect costs without having to measure them directly.
Sometimes the term cost driver is used instead of cost allocation base. A cost driver is any
variable that drives or causes the cost of something. When a cost driver is used to allocate costs, it
is called a cost allocation base.
There are four basic ways to assign costs to cost objects: direct matching, allocation,
apportioning, and allocation and apportioning. In direct matching, a cost item is tied to a single
cost object and is used up in one-time period. In allocation, cost item tied to multiple cost object
and used up in one-time period. In apportioning, cost item tied to a single cost object, but not
exhausted in one period. In allocated and apportioned, cost item tied to multiple cost objects and
not exhausted in one period. Finally, some cost items must be both allocated and apportioned if
they are tied to multiple cost objects and are not exhausted in one period.
The four basic steps in a traditional cost allocation are (1) Assign direct cots to cost objects.
(2) Assign indirect costs to cost pools. (3) Allocate support center costs to missions centers. (4)
Allocate mission center costs to final costs objects. There are two important principles to remember
when performing a cost allocation: (1) The allocation should be performed in a manner that is
consistent with the purpose of the cost analysis. (2) The benefits of better information should
justify the costs of obtaining that information.
Activity-based costing (ABC) is a cost accounting method that estimates the total costs of
a service or product, including the direct cost of labor and materials and the indirect cost of support
activities. Traditional cost accounting techniques tend to distort cost estimates when a service has
substantial overhead costs, and ABC was designed to solve this problem.