Direct Cost Allocation

As noted on Cost Allocation Principles, direct allocation is the immediate assignment of a cost to one (or more) final cost objective(s) of the organization.

Remember that allocation always reflects the benefit received as a result of the cost.

In its basic form, we see a single cost allocated entirely to a single final cost objective.

For example: the full cost of one computer is coded as an expense to Project 12345, which is a final cost objective of the organization.

A more complex form of direct allocation ocurs when a single cost is seen to benefit more than one final cost objective.

For example: office space is rented for a field office that serves two projects of the organization. Each month, the cost of the rent is recorded in the accounting system such that half the cost is assigned to each of the two benefitting projects (final cost objectives). Say the total monthly cost is $400, and the projects are seen to benefit equally from the cost; then in this example, $200 would be allocated to each of the two projects using the office space.

In a similar example using this same monthly rental cost, Project A is recognized to occupy 75% of the rented floor space, with Project B occupying the balance. In this case, it might be reasonable to allocate the $400 monthly cost charging $300 to Project A and $100 to Project B.

Bur always, the entire cost is apportioned among benefitting cost objectives in proportions that reflect the relative benefit received by the cost objectives.

When a cost is allocated to more than one cost objective, it is necessary to document the rationale and method used to assure reasonable allocation of the cost.

In case you just landed here and find yourself wishing for an explanation of cost objective, you'll find that in the topic Cost Objectives.

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