Cost Allocation Principles

What is allocation?

Allocation is the process of identifying a cost (aka expense) with one or more cost objectives.
(Cost objectives are discussed in greater depth in the Cost Objectives topic.)

The word is used with two senses:

  • associating the entire cost with a single cost objective, or
  • dividing the cost among two or more cost objectives, either as a direct allocation or via an intermediate cost objective using indirect allocation.

Under the federal cost principles, costs are allocated to reflect how the cost benefits (is necessary for) the cost objective(s) to which it is assigned. For this discussion, think of necessity and benefit as the same.

Allocation is essential to understanding the total cost of each of the organization's outcomes (final cost objectives). This topic is discussed in greater depth beginning with the page Indirect Cost Allocation.

For now, familiarize yourself with the regulatory requirements:

Total Cost of a Federal Award

2 CFR 200.402 defines the total cost of a federal award as “the sum of the allowable direct and allocable indirect costs less any applicable credits.”

Allowability of costs is discussed in the topic Allowable Costs & Prior Approvals.

Allocability of costs is defined at 2 CFR 200.405.

Applicable Credits are defined at 2 CFR 200.406.

Direct Allocation

A cost is said to be direct when it is allocated immediately to one (or more) final cost objective(s) of the organization. Charging a cost directly to a final cost objective is called direct allocation. There is a separate topic on Direct Cost Allocation.

Indirect Allocation

A cost is said to be indirect when it is allocated first to an intermediate cost objective before the intermediate cost objective is proportionally allocated to all final cost objectives, in accordance with the organizations indirect cost allocation plan. There is a separate topic on Indirect Cost Allocation.

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