Cost allocation - ObjectGears

Distribute your cost to final service recipients...


Cost allocation is part of the management accounting, having the goal to determine which cost relate to certain objects. These can be products, services, external customers, internal teams, projects, sales territories...

Purpose of this process is to:

  • provide information about cost
  • enable proper decision making in the organization
  • motivate employees to desirable behaviour

There is not a single correct way of cost assignment. However, we should consider following principles when defining the cost distribution logic:

Principle of cost generation causality

  • every performance should be loaded just with the cost that it induced
  • preferred approach if it is possible and purposeful to apply

Principle of cost absorption capacity

  • allocation according to the amount of cost that the object is capable to absorb (e.g. in the selling price)
  • can be used also to motivate for a better capacity usage

Principle of averaging

  • it solves which cost fall on average on certain object
Cost allocation concept
Cost allocation concept
From conceptual point of view cost allocation represents projection of a central team budget (e.g. IT) to particular organizational units (teams and countries) according to service consumption when using various cost distribution models.
Example of particular model allocation - Print
There are invoices and salary cost associated with the Print service which are an input to the model. There are also costs allocated to server infrastructure which is necessary to operate print servers. These costs are output of another model dealing with common cost of the infrastructure and they also enter the model Print. Costs are allocated to users according to their print volumes. Users are assigned to teams and countries and therefore the costs can be allocated to these cost objects. 
Example of particular model allocation - Print
Model server - weights according to the configuration
Example of server weights according to the configuration
We can calculate server weight for each server as a weighted average of its basic configuration parameters - CPU, RAM and HDD.
Dashboard with the final cost allocation
Dashboard of the final allocation provides an overview of allocation to customer cost objects.
Dashboard with the final cost allocation

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