Allocated costs

Definition

Allocated costs are expenses that are distributed among different departments or segments within an organization based on a predetermined method. These costs can impact decision-making and performance evaluation in managerial accounting.

5 Must Know Facts For Your Next Test

1. Allocated costs are often used to assess the profitability of different responsibility centers.
2. The method of allocation can significantly influence the perceived performance of a department or segment.
3. Common bases for cost allocation include direct labor hours, machine hours, and square footage.
4. Accurate cost allocation is crucial for making informed decisions about whether to keep or discontinue a segment or product.
5. Misallocation of costs can lead to suboptimal decisions and distorted financial reports.

Review Questions

• What are some common bases used for cost allocation?
• How can allocated costs affect the decision to keep or discontinue a segment?
• Why is accurate cost allocation important for performance evaluation?

Related terms

Responsibility Center: A unit within an organization whose manager is responsible for its activities and performance.

Direct Costs: Expenses that can be directly traced to a specific department, product, or project.

Overhead Costs: Indirect expenses that cannot be attributed to any single department but must be allocated across multiple units.