What is cost allocation?
Published
Cost allocation is dividing a shared cost across the cost centres that benefit from it, on a logical basis. Direct costs are tagged to their centre at recording; allocation concerns shared costs only: a building serving two branches, a manager overseeing everyone.
The basis follows the cause
| Shared cost | Logical allocation basis |
|---|---|
| Rent and utilities | Floor area occupied |
| Supervisory and admin salaries | Headcount or actual time |
| Systems and subscriptions | User count |
| Brand-level marketing | Revenue share (an accepted approximation) |
Example: Al-Waha's SAR 12,000 monthly warehouse rent serves furniture and stationery at 70/30 of area:
Furniture: 12,000 × 70% = 8,400Stationery: 12,000 × 30% = 3,600
The rule that matters most: no causeless allocation
Arbitrary allocation (equal splits "for simplicity," or revenue share for everything) produces centre profitability that looks precise and is invented - and closure or expansion decisions get made on numbers manufactured by the allocation basis, not by performance. Where no convincing causal basis exists, the honest treatment is what the two-branch statement did on the cost centre page: a visible "unallocated shared" line - readable transparency beats false precision.
Frequently asked questions
How often do I refresh allocation ratios?
When the reality behind them changes (area, headcount), with an annual review at minimum - ratios frozen for years are arbitrary allocation on a delay.
Is allocation an entry or a report?
Cleanest as a reporting/tagging layer, not entries shifting amounts between accounts - the ledger stays simple, the analysis stays flexible.