what is the meaning of assignment cost

What is Cost Assignment?

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Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

• Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
• Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

• Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

• Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
• Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

• Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

• White bread: 3,000 loaves × $1.20 per loaf = $3,600
• Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

• White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
• Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

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Cost Allocation

The process of identifying, accumulating, and assigning costs to costs objects

What is Cost Allocation?

Cost allocation is the process of identifying, accumulating, and assigning costs to costs objects such as departments, products, programs, or a branch of a company. It involves identifying the cost objects in a company, identifying the costs incurred by the cost objects, and then assigning the costs to the cost objects based on specific criteria.

When costs are allocated in the right way, the business is able to trace the specific cost objects that are making profits or losses for the company. If costs are allocated to the wrong cost objects, the company may be assigning resources to cost objects that do not yield as much profits as expected.

Types of Costs

There are several types of costs that an organization must define before allocating costs to their specific cost objects. These costs include:

1. Direct costs

Direct costs are costs that can be attributed to a specific product or service, and they do not need to be allocated to the specific cost object. It is because the organization knows what expenses go to the specific departments that generate profits and the costs incurred in producing specific products or services . For example, the salaries paid to factory workers assigned to a specific division is known and does not need to be allocated again to that division.

2. Indirect costs

Indirect costs are costs that are not directly related to a specific cost object like a function, product, or department. They are costs that are needed for the sake of the company’s operations and health. Some common examples of indirect costs include security costs, administration costs, etc. The costs are first identified, pooled, and then allocated to specific cost objects within the organization.

Indirect costs can be divided into fixed and variable costs. Fixed costs are costs that are fixed for a specific product or department. An example of a fixed cost is the remuneration of a project supervisor assigned to a specific division. The other category of indirect cost is variable costs, which vary with the level of output. Indirect costs increase or decrease with changes in the level of output.

3. Overhead costs

Overhead costs are indirect costs that are not part of manufacturing costs. They are not related to the labor or material costs that are incurred in the production of goods or services. They support the production or selling processes of the goods or services. Overhead costs are charged to the expense account, and they must be continually paid regardless of whether the company is selling goods or not.

Some common examples of overhead costs are rental expenses, utilities, insurance, postage and printing, administrative and legal expenses , and research and development costs.

Cost Allocation Mechanism

The following are the main steps involved when allocating costs to cost objects:

1. Identify cost objects

The first step when allocating costs is to identify the cost objects for which the organization needs to separately estimate the associated cost. Identifying specific cost objects is important because they are the drivers of the business, and decisions are made with them in mind.

The cost object can be a brand , project, product line, division/department, or a branch of the company. The company should also determine the cost allocation base, which is the basis that it uses to allocate the costs to cost objects.

2. Accumulate costs into a cost pool

After identifying the cost objects, the next step is to accumulate the costs into a cost pool, pending allocation to the cost objects. When accumulating costs, you can create several categories where the costs will be pooled based on the cost allocation base used. Some examples of cost pools include electricity usage, water usage, square footage, insurance, rent expenses , fuel consumption, and motor vehicle maintenance.

What is a Cost Driver?

A cost driver causes a change in the cost associated with an activity. Some examples of cost drivers include the number of machine-hours, the number of direct labor hours worked, the number of payments processed, the number of purchase orders, and the number of invoices sent to customers.

Benefits of Cost Allocation

The following are some of the reasons why cost allocation is important to an organization:

1. Assists in the decision-making process

Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough to justify the costs allocated. For unprofitable cost objects, the company’s management can cut the costs allocated and divert the money to other more profitable cost objects.

2. Helps evaluate and motivate staff

Cost allocation helps determine if specific departments are profitable or not. If the cost object is not profitable, the company can evaluate the performance of the staff members to determine if a decline in productivity is the cause of the non-profitability of the cost objects.

On the other hand, if the company recognizes and rewards a specific department for achieving the highest profitability in the company, the employees assigned to that department will be motivated to work hard and continue with their good performance.

Additional Resources

Thank you for reading CFI’s guide to Cost Allocation. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Break-Even Analysis
• Cost of Production
• Fixed and Variable Costs
• Projecting Income Statement Line Items
• See all accounting resources

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Why Allocating Costs Is Important for Your Small Business

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Business owners use cost allocation to assign costs to specific cost objects. Cost objects include products, departments, programs, and jobs. Cost allocation is necessary for any type of business, but it's more frequently used in manufacturing businesses that incur a wider variety of costs.

Overview: What is cost allocation?

Part of doing business is incurring costs. To ensure accurate financial reporting, it’s vital these costs are allocated to the appropriate cost object.

While bookkeepers and accounting clerks may need some guidance in properly allocating expenses, using accounting software can help to automate and simplify the entire process considerably.

To track and allocate costs, the cost needs to first be associated with a specific cost object. For example, your company pays $3500 property insurance annually for two buildings you currently own.

One building is 4,000 square feet, while the other building is 8,000 square feet. Your cost object is the square footage of each building, which will be used to allocate the cost to the correct building.

3 types of costs

Most businesses incur a variety of costs while doing business. These costs can range from the cost of materials needed to produce a finished product, to the direct labor wages paid to the employee running the machine used to assemble the product, to the overhead costs you incur every day simply by opening your doors.

Before you get started, familiarize yourself with the various types of costs your business is likely to incur.

1. Direct costs

A direct cost is anything that your business can directly connect to a cost object. Tied directly to production, direct costs are the only costs that need not be allocated, but instead are used when calculating cost of goods sold.

The most common direct costs that a business incurs include direct labor, direct materials, and manufacturing supplies. An employee working the assembly line is considered direct labor, a direct cost.

Same goes for the plastic needed to manufacture a toy, or the glue that holds pieces of the toy together. Direct costs are almost always variable because they vary based on production levels. However, if production remains constant, direct costs may remain constant as well.

2. Indirect costs

Indirect costs are costs incurred in the day to day operations of your business. Indirect costs cannot be tied back to one particular product, but are still considered necessary for production to occur or services to be delivered.

Indirect costs, such as utilities and line supervisor salaries are considered necessary for production, but are not tied to a specific product or service, so they’ll need to be allocated accordingly.

3. Overhead costs

Overhead costs, also known as operating costs are the everyday cost of doing business. Overhead costs are never tied to production, either directly or indirectly, but instead are the costs that your business incurs whether or not they’re producing goods or providing services.

For example, rent, insurance, and office supplies are considered overhead costs, which are costs incurred regardless of production levels.

Some overhead costs such as supplies and printing can be variable, while others, such as rent, insurance, and management salaries are all fixed costs, since the cost does not change from month to month. Like indirect costs, overhead costs will need to be allocated regularly in order to determine actual product cost.

Cost allocation examples

Cost allocation isn’t only necessary for manufacturing companies. There are plenty of reasons other companies may need to allocate costs.

Allocating an employee’s salary between two departments, allocating a utility bill between administrative and manufacturing facilities, or a nonprofit that needs to allocate costs between various programs are just a few reasons almost any business may need to regularly allocate costs.

When allocating costs, there are four allocation methods to choose from.

• Direct labor
• Machine time used
• Square footage
• Units produced

In the examples below, we used the square footage and the units produced methods to calculate the appropriate cost allocation.

Cost allocation example 1

Ken owns a small manufacturing plant, with administrative offices housed on the second floor. The square footage of the plant is 5,000 square feet, while the administrative offices are 2,500 square feet, with rent for the entire facility $15,000 per month. Rent must be allocated between the two departments.

The calculation would be:

$15,000 (rent) ÷ 7,500 (square feet) = $2 per square foot

Next, Ken, will calculate the rental cost for the plant:

$2 x 5,000 = $10,000

That means that Ken can allocate $10,000 to overhead expenses for the factory.

Next, Ken will calculate the rental cost for the administrative offices:

$2 x 2,500 = $5,000

The balance of the rent, $5,000, will be allocated to the administrative offices.

Cost allocation example 2

Carrie’s manufacturing company manufactures backpacks. In July, Carrie produced 2,000 backpacks with direct material costs of $5.50 per backpack, and $ 2.25 direct labor costs per backpack.

She also had $7,250 in overhead costs for the month of July. Using the number of units produced as the allocation method, we can calculate overhead costs using the following overhead cost formula:

$7,250 ÷ 2,000 = $3.63 per backpack

When added to Carrie’s direct costs, the cost to produce each backpack is $11.38, calculated as follows:

• Direct Materials: $ 5.50 per backpack
• Direct Labor: $ 2.25 per backpack
• Overhead: $ 3.63 per backpack
• Total Cost: $11.38 per backpack

If Carrie did not allocate the overhead costs, she probably would have underpriced the backpacks, resulting in a loss of income.

No, cost allocation is necessary for any business including service businesses and nonprofit organizations.

To track and allocate costs, the cost needs to be identified with a cost object, which costs are assigned to. Cost objects can include:

• Departments

Almost anything can be considered a cost object if you’re able to assign a cost to it.

Yes. While larger companies may have a greater need to allocate costs, smaller businesses can also benefit from allocating costs properly.

For example, even a small car repair shop will need to allocate parts and labor costs properly, while a small consulting business will need to allocate travel costs to the appropriate customer.

Why you should be allocating costs

Cost allocation is important for any business, large or small. How can you determine how much to charge for goods or services if you have no idea how much it costs to produce the goods or services you currently offer your customers?

Properly allocating costs is also essential for accurate financial reporting. Business owners rely on financial statements to make management decisions, and if the reports are inaccurate, it’s likely the decisions made will negatively affect the business.

Finally, allocating costs properly can help you identify profitable areas of your business and products or services that may be losing money, enabling you to make proactive decisions regarding both.

There’s no good reason not to allocate your business costs, so why not get started today?

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Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

• Assets are resources that the company owns
• Liabilities are debts
• Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

• Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

• Record direct materials and direct labor for a job
• Record allocated manufacturing overhead
• Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

• Reading: Direct Costs
• Self Check: Direct Costs
• Reading: Allocated Overhead
• Self Check: Allocated Overhead
• Reading: Subsidiary Ledgers and Records
• Self Check: Subsidiary Ledgers and Records
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
• What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

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What Is Cost Allocation?

Cost allocation is a process businesses use to identify costs. Here's everything you need to know.

Table of Contents

Entrepreneurs, small business owners and managers need accurate, timely financial data to run their operations. Specifically, understanding and connecting costs to items or departments helps them create budgets, develop strategies and make the best business decisions for their organizations. This is where cost allocation comes in. Detailed cost allocation reports help businesses ensure they’re charging enough to cover expenses and make a profit. 

While a detailed cost allocation report may not be vital for extremely small businesses, more complex businesses require cost allocation to optimize profitability and productivity.

What is cost allocation?

Cost allocation is the process of identifying and assigning costs to business objects, such as products, projects, departments or individual company branches. Business owners use cost allocation to calculate profitability. Costs are separated or allocated, into different categories based on the business area they impact. These amounts are then used in accounting reports . 

For example, say you’re a small clothing manufacturer. Your product line’s cost allocation would include materials, shipping and labor costs. It would also include a portion of the operation’s overhead costs. Calculating these costs consistently helps business leaders determine if profits from sales are higher than the costs of producing the product line. If not, it can help the owner pinpoint where to raise prices or cut expenses .

For a larger company, cost allocation is applied to each department or business location . Many companies also use cost allocation to determine annual bonuses for each area.

Types of costs

If you’re starting a business , the cost allocation process is relatively straightforward. However, larger businesses have many more costs that can be divided into two primary categories: direct and indirect costs:

• Purchased inventory
• Materials used to make inventory
• Direct labor costs for employees who make inventory
• Payroll for those who work in operations
• Manufacturing overhead, including rent, insurance and utilities costs
• Other overhead costs, including expenses that support the company but aren’t directly related to production, such as marketing and human resources

What is a cost driver?

A cost driver is a variable that affects business costs, such as the number of invoices issued, employee hours worked or units of electricity used. Unlike cost objects, such as units produced or departments, a cost driver reflects the reason for the incurred cost amounts. 

How to allocate costs

While cost objects vary by business type, the cost allocation process is the same regardless of what your company produces. Here are the steps involved.

1. Identify your business’s cost objects.

Determine the cost objects to which you want to allocate costs, such as units of production, number of employees or departments. Remember that anything within your business that generates an expense is a cost object. Review each product line, project and department to ensure you’ve gathered all cost objects for which you must allocate costs.

2. Create a cost pool.

Next, create a detailed list of all business costs. Categories should cover utilities, business insurance policies, rent and any other expenses your business incurs.

3. Choose the best cost allocation method for your needs.

After identifying your business’s cost objects and creating a cost pool, you must choose a cost allocation method. Several methods exist, including the following standard ones: 

• Direct materials cost method: This cost allocation method assumes all products have the same allocation base and variable rate.
• Direct labor cost method: This cost allocation method is most helpful if labor costs can be allocated to one product or if expenses vary directly with labor costs.
• High/low method. This cost allocation method is best if you have more than one cost driver and each driver has different fixed or variable rates.
• Step-up or step-down method: With this cost allocation method, departments are first ranked and then the cost of services is allocated from one service department to another in a series of steps. 
• Full absorption costing (FAC): This cost allocation method combines direct material and direct labor costs with a predetermined FAC rate based on company historical data or industry standards.
• Variable costing: Consider this cost allocation method if your business has many variable cost allocations (costs that vary by quantity) and uses significant direct labor.

4. Allocate costs.

Now that you’ve listed cost objects, created a cost pool and chosen a cost allocation method, you’re ready to allocate costs. 

Here’s a cost allocation example to help you visualize the process: 

Dave owns a business that manufactures eyeglasses. In January, Dave’s overhead costs totaled $5,000. In the same month, he produced 3,000 eyeglasses with $2 in direct labor per product. Direct materials for each pair of eyeglasses totaled $5. Here’s what cost allocation would look like for Dave: Direct costs: $5 direct materials + $2 direct labor = $7 direct costs per pair Indirect costs: Overhead allocation: $5,000 ÷ 3,000 pairs = $1.66 overhead costs per pair Direct costs: $7 per pair + Indirect costs: $1.66 per pair Total cost: $8.66 per pair

As you can see, cost allocation helps Dave determine how much he must charge wholesale for each pair of eyeglasses to make a profit. Larger companies would apply this same process to each department and product to ensure sufficient sales goals.

5. Review and adjust cost allocations.

Cost allocations are never static. To be meaningful, they must be monitored and adjusted constantly as circumstances change.

What are the benefits of cost allocation?

Accurate, regular cost allocation can bring your business the following benefits: 

• Helps you run your business: The information you glean from cost allocation reports helps you perform vital functions like preparing income tax returns and creating financial reports for investors, creditors and regulators. 
• Informs business decisions: Cost allocation is an excellent business decision tool that can help you monitor productivity and justify expenses. Cost allocation gives a detailed overview of how your business expenses are used. From this perspective, you can determine which products and services are profitable and which departments are most productive. 
• Helps produce accurate business reports: Tax accounting, financial accounting and management accounting all require some kind of cost allocation. This information is the foundation of accurate business reports. 
• Can reveal accurate production costs: Knowing what it costs to create a product, including all expenses allocated to it, is essential to making good pricing decisions and allocating resources efficiently.
• Helps you evaluate staff: Cost allocation can help you assess the performance of different departments and staff members. If a department is not profitable, staff productivity may need improvement. 

Common cost allocation mistakes

To get the most from cost allocation, avoid these common mistakes:

• Equal or inflexible allocation : Cost allocation is not as simple as allocating any given cost over different product lines or departments. Some cost objects require more time, expense or labor than others, for example.
• Missing costs: Costing is meaningless if it doesn’t include all expenses. Don’t forget costs, such as overhead, time spent and intangible expenses.
• Failing to adjust as needed: Costs and priorities in business are changing constantly. Be sure your cost allocations are monitored and adjusted to meet your information needs.
• Not considering fluctuating revenue with indirect costs: If your business is seasonal or fluctuates over time, it’s important to account for that when allocating costs. 

Cost allocation and your business

Even if you operate a very small business, it’s essential to properly allocate your expenses. Otherwise, you could make all-too-common mistakes, such as charging too little for your product or spending too much on overhead. Whether you choose to start allocating costs on your own with software or with the help of a professional small business accountant , cost allocation is a process no business owner can afford to overlook.

Dachondra Cason contributed to this article. 

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The FloQast Advantage

What is Cost Allocation? Definition & Process

Jul 16, 2020 Michael Whitmire

Working with the former accountants now working at FloQast, we decided to take a look at some of the pillars of the accounting professions.

The key to running a profitable enterprise of any kind is making sure that your prices are high enough to cover all your costs — and leave at least a bit for profit. For a really simple business — like the proverbial lemonade stand that almost every kid ran — that’s pretty simple. Your costs are what you (or your parents) paid for lemons and sugar. But what if it’s a more complex business? Then you might need to brush up on cost accounting, and learn about allocation accounting . Let’s walk through this using the hypothetical company, Lisa’s Luscious Lemonade. 

What is cost allocation ?

The cost allocation definition is best described as the process of assigning costs to the things that benefit from those costs or to cost centers . For Lisa’s Luscious Lemonade, a cost center can be as granular as each jug of lemonade that’s produced, or as broad as the manufacturing plant in Houston. 

Let’s assume that the owner, Lisa, needs to know the cost of a jug of lemonade. The total cost to create that jug of lemonade isn’t just the costs of the water, lemons, sugar and the jug itself, but also includes all the allocated costs to make it. 

Let’s start by defining some terms…

Direct costs are costs that can be traced directly to the product or service itself. For manufacturers, these consist of direct materials and direct labor. They appear in the financial statements as part of the cost of goods sold .

Direct materials are those that become an integral part of the finished product. This will be the costs of the water, sugar, lemons, the plastic jug, and the label. 

Direct labor includes the labor costs that can be easily traced to the production of those finished products. Direct labor for that jug will be the payroll for the workers on the production line. 

Indirect costs are the costs that can’t be easily traced to a product or service but are clearly required for making whatever an enterprise sells. This includes materials that are used in such insignificant quantities that it’s not worth tracing them to finished products, and labor for employees who work in the factory, but not on the production line. 

Overhead costs encompass all the costs that support the enterprise that can’t be directly linked to making the items that are sold. This includes indirect costs , as well as selling, marketing, administration, and facility costs. 

Manufacturing overhead includes the overhead costs that are directly related to making the products for sale. This includes the electricity, rent, and utilities for the factory and salaries of supervisors on the factory floor. 

Product costs are all the costs in making or acquiring the product for sale. These are also known as manufacturing costs or total costs . This includes direct labor, direct materials, and allocated manufacturing overhead. 

What is the process?

The first step in any cost allocation system is to identify the cost objects to which costs need to be allocated. Here, our cost objec t is a jug of lemonade. For a more complex organization, the cost object could be a product line, a department, or a branch. 

Direct costs are the simplest to allocate. Last month, Lisa’s Luscious Lemonades produced 50,000 gallons of lemonade and had the following direct costs:

                                    Total costs     Cost per gallon Direct materials        $142,500               $2.85 Direct labor                   $37,500                   $.75

How are costs allocated?

Allocating overhead costs is a bit more complex. First, the overhead costs are split between manufacturing costs and non-manufacturing costs. Some of this is pretty straightforward: the factory floor supervisor’s salary is clearly a manufacturing cost, and the sales manager’s salary is a non-manufacturing cost. But what about the cost of human resources or other service departments that serve all parts of the organization? Or facilities costs, which might include the rent for the building, insurance, utilities, janitorial services, and general building maintenance?

Human resources and other services costs might be logically split based on the headcount of the manufacturing versus non-manufacturing parts of the business. Facilities costs might be split based on the square footage of the manufacturing space versus the administrative offices. Electricity usage might be allocated on the basis of square footage or machine hours , depending on the situation. 

Let’s say that for Lisa’s Luscious Lemonades, after we split the overhead between manufacturing and non-manufacturing costs, we have the following annual manufacturing overhead costs : 

Supervisor salary                                  $84,000 Indirect costs                                         $95,000 Facility costs                                           $150,000 Human resources                                  $54,000 Depreciation                                          $65,000 Electricity                                                $74,000 Total manufacturing overhead             $522,000

In a perfect world, it would be possible to keep an accurate running total of all overhead costs so that management would have detailed and accurate cost information. However, in practice, a predetermined overhead rate is used to allocate overhead using an allocation base . 

This overhead rate is determined by dividing the total estimated manufacturing overhead by the estimated total units in the allocation base . At the end of the year or quarter, the allocated costs are reconciled to actual costs. 

Ideally, the allocation base should be a cost driver that causes those overhead costs . For manufacturers, direct labor hours or machine-hours are commonly used. Since Lisa only makes one product — gallon jugs of lemonade — the simplest cost driver is the number of jugs produced in a year. 

If we estimate that 600,000 gallons of lemonade are produced in a year, then the overhead rate will be $522,000 / 600,000 = $.87 per gallon.

Our final cost to produce a gallon of Lisa’s Luscious Lemonade is as follows:

Direct materials                             $2.85 Direct labor                                     $0.75 Manufacturing overhead               $0.87 Total cost                                         $4.47

What is cost allocation used for?

Cost allocation is used for both external reporting and internally for decision making. Under generally accepted accounting principles (GAAP), the matching principle requires that expenses be reported in the financial statements in the same period that the related revenue is earned. 

This means that manufacturing overhead costs cannot be expensed in the period incurred, but must be allocated to inventory items, where those costs remain until the inventory is sold, when overhead is finally expensed as part of the cost of goods sold. For Lisa’s Luscious Lemonade, that means that every time a jug of lemonade is produced, another $4.47 goes into inventory. When a jug is sold, $4.47 goes to the cost of goods sold. 

However, for internal decision-making, the cost allocation systems used for GAAP financials aren’t always helpful. Cost accountants often use activity-based costing , or ABC, in parallel with the cost allocation system used for external financial reporting . 

In ABC, products are assigned all of the overhead costs that they can reasonably be assumed to have caused. This may include some — but not all — of the manufacturing overhead costs , as well as operating expenses that aren’t typically assigned to products under the costing systems used for GAAP. 

AutoRec to keep you sane

Whatever cost accounting method you use, it’s going to require spreadsheets that you have to reconcile to the GL. Combine that with the other reconciliations you have to do to close out the books, and like Lisa’s controller, you might be ready to jump into a vat of lemonade to drown your sorrows. 

Enter FloQast AutoRec. Rather than spend hours every month reconciling accounts, AutoRec leverages AI to match one-to-one, one-to-many, or many-to-many transactions in minutes. Simple set up means you can start using it in minutes because you don’t need to create or maintain rules. Try it out, and see how much time you can save this month. 

Ready to find out more about how FloQast can help you tame the beast of the close?

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

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COST ASSIGNMENT Definition

COST ASSIGNMENT involves assigning costs of an account to the accounts that are responsible or accountable for incurring the cost. For example, the cost of issuing purchase orders is allocated to the various objects procured. The cost assignment is done through assignment paths and cost drivers. The assignment path identifies the source account (the account whose cost is being assigned "Issue Purchase Orders" in the above example) and destination accounts (the accounts to which the costs are being allocated the various cost objects procured by issuing purchase orders in the above example). The cost driver identifies the measure or rationale on the basis of which the assignment needs to be done, that is, whether the costs of issuing purchase orders need to be assigned to various cost objects evenly, based on some defined percentage values, or based on some criterion, like the number of purchase orders of each cost object issued. Defining the cost drivers and assignment paths (i.e., source and destination accounts) enable proper assignment and accounting of the various costs incurred in the organization.

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BENEFIT PERIOD is the projected useful life time period over which an asset will be productive.

REALIZATION PRINCIPLE is that revenue should be recognized at the time goods is sold and services are rendered.

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The Comprehensive Guide to Cost Allocation in Accounting

Accounting is a fascinating field, and cost allocation is one of the most important concepts in accounting. Whether you’re an accounting student or an accountant just starting out, it’s important to understand how to allocate costs.

In this comprehensive guide, we’ll cover everything from what it means to its pros and cons. 

How Can Costs Be Allocated Among Departments or Product Lines When There Is No Clear Source?

Allocation is distributing costs among different departments or product lines in an organization. Trying to accurately estimate the cost of producing a good or rendering a service is a common challenge for many businesses.

This is especially true when there is no apparent source of the costs, as it requires the use of various techniques and methods to distribute the expenses fairly and reasonably.

What Is the Concept of Allocation?

Allocation (also known as “cost allocation”) is a process used to distribute the costs of a shared resource or expense among different departments, product lines, or activities within an organization.

This process is necessary to accurately determine the cost of producing a product, providing a service, or running a business. Allocation allows firms to identify the expenses incurred by each department or product line and helps make informed decisions about allocating resources.

The allocation concept has existed for centuries and is a fundamental part of modern accounting and financial management. The cost allocation process involves assigning costs to specific departments or product lines based on objective criteria, such as resource use or the benefit received from the expense.

The objective criteria used in the allocation process may vary depending on the type of business, but the goal is always to distribute the costs fairly and reasonably.

One of the main challenges of allocation is that many expenses cannot be traced directly to a specific department or product line. For example, the cost of electricity used to run a manufacturing plant cannot be directly traced to one particular product line.

In such cases, the cost of electricity must be allocated to different departments or product lines based on objective criteria, such as the number of hours each department uses the electricity or the production output of each product line.

There are different methods of allocation, each with its strengths and weaknesses. Some of the most common ways include direct allocation, step-down allocation, sequential allocation, and activity-based allocation. Each mode uses a different approach to allocating costs, but the goal is always to ensure that the costs are distributed fairly and reasonably.

What Doesn’t the Term Allocation Mean?

The term allocation” is commonly used in various contexts, such as finance, economics, project management, and resource management. However, it’s essential to understand that allocation ” doesn’t mean “equal distribution” or “uniform distribution” of resources.

Allocation refers to assigning a portion of resources, such as time, money, or labor, to specific tasks or activities. The goal of allocation is to optimize the use of resources to achieve the desired outcomes.

One of the most common misunderstandings about allocation is that it means dividing resources equally among tasks or activities. However, this is only sometimes the case. Resources are often not distributed evenly because different tasks or activities have different requirements and priorities.

For example, in project management, some jobs may require more time, money, or labor than others. In such cases, the project manager must allocate more resources to these critical tasks to ensure the project’s success.

Another misunderstanding about allocation is that it means distributing resources inflexibly and rigidly. Allocation is a flexible process that can be adjusted based on priorities or changes in resource availability. For example, in a business setting, the budget allocation may change based on market conditions or changes in customer demand. In these situations, the business must be able to reallocate its resources to respond to these changes.

The allocation also doesn’t mean that the resources are assigned once and never adjusted. Allocation is an ongoing process requiring constant monitoring and adjustments to ensure that resources are used optimally.

For example, in finance, the allocation of investments must be reviewed regularly to ensure that the portfolio is aligned with the investor’s goals and objectives.

Another misconception about allocation is that it only applies to tangible resources, such as money or equipment. However, allocation also applies to intangible resources like time and labor. These intangible resources are often more critical and limited than tangible ones. For example, allocating time is crucial in project management to ensure that projects are completed on time and within budget.

As you can see, allocation is a complex and flexible process that requires careful consideration of multiple factors, such as resource availability, priorities, and goals. It’s essential to understand that allocation doesn’t mean equal distribution or limited distribution of resources.

Instead, it’s a dynamic process that requires ongoing monitoring and adjustments to ensure the optimal use of resources. By avoiding common misconceptions about allocation, individuals and organizations can more effectively allocate their resources and achieve their desired outcomes.

Where the Term Allocation Originated From?

The word “allocation” comes from the Latin word “allocare.” The word allocation ” refers to setting aside or assigning a particular portion, amount, or portion of something for a specific purpose or recipient.

The allocation comes from the Latin prefix ad- (meaning “to”) and the noun loci (meaning “place”). The combination of these two words implies the idea of assigning a place, or portion of something, for a specific purpose.

In finance and economics, “allocation” refers to distributing resources, such as money, to different projects or initiatives based on their perceived importance and likelihood of success.

The allocation concept is ancient and can be traced back to the earliest civilizations, where resources were allocated based on the community’s needs. In early societies, central planning or direct control by the ruling class were common methods of allocation.

However, with the advent of market-based economies, the allocation has become more decentralized and is now primarily done through the market mechanism of supply and demand.

In modern economies, allocation is crucial in ensuring that resources are used efficiently and effectively. For example, in capital allocation, investors allocate their funds to different projects and businesses based on the perceived potential return on investment. This helps direct investment toward the most promising and profitable opportunities, thereby increasing the economy’s overall efficiency.

Similarly, prices play a crucial role in allocating goods and services in directing resources to where they are most needed. In a market economy, the interaction of supply and demand determines prices. When demand for a particular good or service is high, the price will increase, directing more resources toward its production. On the other hand, when demand is low, the price will decrease, reducing the allocation of resources to its production.

Government policies and regulations can also have an impact on allocation in addition to the market mechanism. For example, the government may allocate resources to specific sectors through funding or subsidies, such as education or healthcare.

Similarly, government regulations and taxes can also impact the allocation of resources by affecting the incentives for businesses and individuals to allocate their resources in a particular way.

How Allocation Relates to Accounting?

In accounting, allocation determines the cost of producing a product or providing a service. This information is then used to create accurate financial statements and make informed decisions about allocating resources in the future.

For example, a company may allocate resources to a new product line based on the expected revenue it will generate or distribute costs to specific departments based on their usage of resources.

The allocation also plays a crucial role in cost accounting . Cost accounting involves analyzing the cost of production, including direct and indirect costs, and using this information to make decisions about pricing and resource allocation.

By accurately allocating costs, a company can determine the actual cost of production and make informed decisions about pricing , production volume, and resource allocation.

In addition, allocation is used to allocate the costs of long-term assets, such as property, plant, and equipment. This is done through the process of depreciation, which is a systematic allocation of the cost of an asset over its useful life. Depreciation is used to determine the value of an investment for financial reporting purposes and the amount of tax that a company must pay.

Finally, allocation is also used in the budgeting process. In budgeting, an organization allocates resources to various departments and activities based on their priorities and goals. By accurately allocating resources, a company can ensure that it has enough resources to meet its goals and objectives while staying within its budget.

3 Examples of Allocation Being Used in Accounting Practice

Example #1 of allocation being used in accounting practice.

Allocating the Cost of Goods Sold In accounting, “cost of goods sold” (COGS) refers to the direct costs associated with producing a product or providing a service. These costs include the raw materials, labor, and overhead expenses incurred to produce the goods. COGS is crucial in determining a company’s gross profit because it represents the cost of producing and selling a product.

One example of allocation in accounting practice is when a company allocates the cost of goods sold to each product. This is done to understand the cost of producing each product and identify the most profitable products. 

The allocation process involves dividing the total COGS by the number of units sold to arrive at an average cost per unit. This average cost per unit is then applied to each unit of product sold to determine the COGS for that specific product.

This allocation process is vital because it allows the company to accurately determine the cost of producing each product. This information is then used to make informed business decisions such as pricing strategies, production decisions, and cost control measures. 

For example, suppose a company realizes that the cost of producing one product is much higher than the cost of producing another. In that case, it may choose to discontinue the higher-cost product or find ways to reduce the cost of production.

Example #2 of Allocation Being Used in Accounting Practice

One example of allocation in accounting practice is allocating indirect costs to different departments or products within a company. Indirect costs, such as rent, utilities, and office supplies, cannot be directly traced to a specific product or department. These costs must be allocated among different departments or products to calculate the cost of each accurately.

For example, consider a manufacturing company with three departments: production, research and development, and administration. The company has a total indirect cost of $100,000 for the year, which includes rent, utilities, and office supplies.

The company might determine the proportion of space each department uses to allocate these costs. If production uses 40% of the total space, R&D uses 30%, and administration uses 30%, the company would allocate 40% of the indirect costs to production, 30% to R&D, and 30% to administration.

Next, the company might allocate indirect costs based on the number of employees in each department. If production has 20 employees, R&D has 15, and administration has 10, the company would allocate indirect costs based on the ratio of employees in each department.

In this example, production would receive 40% of the indirect costs, R&D would receive 30%, and administration would receive 30%.

Finally, the company might allocate indirect costs based on the number of products produced in each department. If production produces 1000 products, R&D produces 500, and administration produces none, the company would allocate indirect costs based on the ratio of products produced in each department.

In this example, production would receive 67% of the indirect costs, R&D would receive 25%, and administration would receive 8%.

Example #3 of Allocation Being Used in Accounting Practice

Suppose a manufacturing company produces two products: Product A and Product B. To determine the cost of each product, the company must allocate the factory overhead costs, including utilities, rent, maintenance, and supplies, among other expenses. The overhead costs must be assigned to each product based on the proportion of total machine hours used to produce each product.

For example, if the company uses 60% of the total machine hours to produce Product A and 40% to produce Product B, then 60% of the factory overhead costs would be allocated to Product A and 40% to Product B. The company would then use the allocated overhead costs and the direct costs of material and labor to calculate the total cost of each product.

The allocation of overhead costs to each product is critical for the company to accurately determine the cost of goods sold and price its products competitively. The company can use an allocation method to ensure a fair and accurate picture of the costs of producing each product.

How to Do Cost Allocation in Simple Steps?

Cost allocation can be complex, but it doesn’t have to be. Here are five simple steps for cost allocation:

Step 1: Identify the Costs That Need to Be Allocated

The first step in cost allocation is identifying the costs that need to be allocated. This includes both direct and indirect costs. Direct costs can be easily traced to specific products or services, while indirect costs, such as rent and utilities, cannot.

Step 2: Choose the Appropriate Method of Cost Allocation

Once you have identified the costs that need to be allocated, the next step is to choose the appropriate cost allocation method. The most common methods include direct cost allocation, step-down allocation, sequential allocation, and activity-based costing. The method chosen will depend on the nature of the costs and the objectives of the cost allocation process.

Step 3: Determine the Allocation Base

The allocation base is the basis on which the costs will be allocated. This can be the number of units produced, the number of employees, or any other relevant factor that can be used to determine the cost of goods or services.

Step 4: Allocate the Costs

Once you have determined the allocation base, the next step is to allocate the costs. This can be done by dividing the total cost by the number of units, employees, or another relevant factor and multiplying this by the number of units, employees, or another relevant factor for each product, service, or department.

Step 5: Review and Adjust the Cost Allocation

Once the costs have been allocated, the final step is to review and adjust the cost allocation as necessary. This may involve reallocating costs based on new information or changes in the business.

Which Industries Can Cost Allocation Be Applied?

With the proper guidance, cost allocation can be applied to almost any industry. It’s all about the data you have and how you use it.

Let’s take a look at some of the industries that could benefit from cost allocation:

The healthcare industry is one of the most expensive in the world. It is also one of the most heavily regulated. These factors make cost allocation a necessity for many healthcare providers.

Healthcare organizations have many different costs, but the most significant sources are labor and supplies. Labor costs can be very high in this industry because it requires highly skilled people to perform various tasks, including surgery, patient care, and patient education. Supplies like bandages and IV bags are also expensive because they have to be sterile and meet regulatory requirements.

A hospital’s supply department has much control over its budget, but it also has little control over what happens in other departments, such as surgery or patient care. This makes it difficult to allocate costs accurately when they don’t know how much they will spend on supplies or how many patients they’ll see each year.

Cost allocation helps solve these problems by allowing managers to see which departments are consuming the most resources. They can adjust accordingly without guessing what’s happening behind closed doors (or behind locked doors).

Manufacturing

The manufacturing industry is one of the most common places where cost allocation can be applied. In this industry, it is crucial to know how much it costs to make each product and how much it costs to produce goods (including materials and labor) for sale.

With this information, manufacturers can determine how much they need to charge for their products to cover all of their expenses, including overhead costs like rent or electricity bills.

Cost allocation can also help manufacturers determine which products are more profitable than others so that they can focus on those areas instead of wasting time and money on less popular lines of goods. For example, suppose a company produces clothing and electronics but finds its clothing line more popular among consumers than its electronics line.

In that case, it may want to stop producing electronics altogether because there would need to be more demand for these products for them to make any money off of them.

This is an industry that benefits from cost allocation. Energy companies have long been able to allocate costs to different projects and branches, but they often face challenges when assigning overhead expenses. That’s because overhead costs are shared among the company’s functions, making them difficult to track.

Cost allocation software can help energy companies assign overhead expenses in a way that makes sense for each project or branch. The software also allows them to better understand where their money is going and gives them more flexibility in budgeting and forecasting future expenses.

Retailers are a great example of an industry that can benefit from cost allocation.

Retailers are often sold on the idea of one-stop shopping: you go to a store and buy everything you need, from clothing to food to furniture. But in reality, there are many different types of retailers, such as grocery stores, department stores, clothing stores, etc. And each has its own distinct set of costs for running that type of business. So how do these retailers know how much each product line contributes to their overall profits? They use cost allocation.

Cost allocation is a technique for allocating overhead costs across product lines based on their relative importance to the company’s overall performance. This way, retailers can determine which products contribute most (or least) to their bottom line and make decisions accordingly.

Information Technology

Information technology (IT) is one of the most significant cost allocation areas. IT costs are often divided into two categories: direct costs and indirect costs. The former refers to those costs that can be directly attributed to a particular project or product, while the latter refers to those costs that cannot be directly attributed.

Cost allocation in IT has many benefits. It helps managers determine how much it costs to develop a new product or service and where inefficiencies lie in their IT departments.

It also allows them to understand better how much revenue they’re generating from each product or service line, which will help them make better decisions about future investments in the company’s infrastructure.

Construction

This is one of the most apparent industries to apply cost allocation. Construction projects are often massive and complex, with many different stakeholders involved in the planning, execution, and completion of a project. It’s common for construction projects to have hundreds or thousands of contracts with hundreds or thousands of different suppliers.

Cost allocation helps ensure that those involved in the project are paid what they’re owed without overpaying anyone else who participated. It’s also used to ensure that a company only spends a little money on a project by ensuring that every expense is only charged once.

Transportation

This is the industry that can benefit the most from cost allocation.

Transportation has many parts that must work in unison to transport goods or passengers. It can be difficult to determine which part of a vehicle’s operation should be allocated to specific parts, and it usually requires a lot of math.

Cost allocation can make it easier for companies in this industry to understand which parts are costing them more than they expected so that they can make changes accordingly.

Food and Beverage

Food and beverage companies can benefit significantly from cost allocation. These companies are typically comprised of many different departments that must be managed to ensure the entire business runs smoothly. Each department has specific costs that it incurs, so allocating those costs among all of the departments will help you understand where your money is going and how it can be used most effectively.

Cost allocation is also helpful when dealing with food or beverage products because it allows you to track the costs associated with each product line and make sure you profit on every product line. This way, you know what kinds of products are selling well, which ones aren’t selling as well, and how much money each product line has made for your company.

Real Estate

This is one of the most common industries to use cost allocation methods. Real estate developers often create multiple project phases, which must be accounted for separately. The costs of these phases are usually allocated to determine how much profit (or loss) will be made in each phase.

This lets developers decide which phases should be completed first and what incentives may be offered to convince buyers to purchase units from those phases.

Utilities are another excellent example of an industry where cost allocation can be used.

They must deal with various costs, including purchasing raw materials, paying for labor, and buying equipment. The type of utility and the sector it operates in determine the cost of each of these. For example, a water utility may have very high costs for purchasing raw materials but low costs for labor and employee benefits because they only need a few employees or benefit packages.

Cost allocation can help utilities determine how much money they should spend on each part of their business so that they’re not overspending on one part while underinvesting in another.

Pros of Cost Allocation

Cost allocation is a common business practice. Companies use it to help determine the profitability of individual products, services, and departments within a company. Here are the pros of cost allocation:

Improved Decision Making

Cost allocation helps businesses make informed decisions by accurately determining the cost of goods or services. Companies can make informed decisions on pricing, production, and marketing strategies with a better understanding of the costs associated with producing a product or offering a service.

Better Resource Allocation

Cost allocation helps businesses to determine the costs associated with different departments, products, or services. This information can then be used to allocate resources more efficiently and allocate more resources to more profitable areas.

Increased Profitability

By allocating costs accurately, businesses can identify less profitable areas and make changes to improve profitability. This could involve reducing costs, improving efficiency, or adjusting pricing.

Better Budget Planning

Cost allocation helps businesses to create more accurate budgets. Companies can plan their budgets more effectively as they understand the costs associated with each product, service, or department.

Improved Internal Control

Cost allocation helps businesses to maintain better internal control over their operations. By allocating costs accurately, companies can track expenses and identify improvement areas. This helps to prevent fraud and embezzlement and increases accountability within the company.

Better Understanding of Overhead Costs

Overhead costs can be challenging to understand and allocate accurately. Cost allocation helps businesses to understand these costs better and allocate them to the proper departments or products. This allows companies to make informed decisions on pricing and production.

Improved Cost Reporting

Cost allocation helps businesses to produce more accurate cost reports. This allows companies to make informed pricing, production, and marketing strategies decisions. Cost reports are also essential for tax purposes and to meet regulatory requirements.

Better Negotiations

Cost allocation helps businesses to understand their costs better, which can be used in negotiations with suppliers and customers. Companies can better understand costs and negotiate better prices, terms, and conditions with suppliers and customers. This helps businesses to maintain better relationships and increase profitability.

Cons of Cost Allocation

Cost allocation can be an excellent tool for helping you understand where your money is going and how to save it, but this method has some drawbacks.

Time-Consuming Process

Cost allocation can be time-consuming and requires significant effort from various departments within the company. This can divert resources from other important tasks and may slow down other processes.

Increased Complexity

Cost allocation can be complex, especially for large organizations with multiple departments and products. This complexity can result in errors and misunderstandings, negatively impacting the accuracy of cost reports and other important financial information.

Implementing a cost allocation system can be expensive and require a significant investment in technology, software, and training. This cost can be a barrier for smaller organizations or those with limited resources.

Unreliable Data

Cost allocation is only as accurate as the data used in the process. Poor quality data, errors in data entry, and outdated data can all result in inaccurate cost reports and inefficient resource allocation.

Resistance to Change

Some employees may resist implementing a cost allocation system, especially if they feel the process may negatively impact their department or lead to job loss.

Limited Flexibility

Cost allocation systems are often rigid and lack the flexibility to adapt to changes in business conditions. This can result in inefficiencies and limit the ability of the company to respond to new opportunities or challenges.

Potential for Misallocation

If not implemented correctly, cost allocation can misallocate costs, negatively impacting decision-making and profitability.

Dependence on Cost Allocation

Overreliance on cost allocation can lead to a lack of creativity and initiative within departments. Employees may become too focused on cost allocation and need to be more focused on driving innovation and growth for the company. This can limit the ability of the company to adapt to changing market conditions.

Frequently Asked Questions- Cost Allocation in Accounting

What are the main objectives of cost allocation.

The main objectives of cost allocation are to accurately determine the cost of goods or services, improve resource allocation, increase profitability, create more accurate budgets, improve internal control, and provide better cost reporting.

What Is Direct Cost Allocation?

Direct cost allocation refers to assigning costs directly to specific products or services. This method is used when the costs can be easily traced to specific business areas.

What Is Step-Down Allocation?

Step-down allocation refers to allocating costs from one department to another department or product. This method is used when costs cannot be directly traced to specific products or services.

What Is Sequential Allocation?

Sequential allocation refers to allocating costs based on the sequence in which they are incurred. This method is used when costs cannot be directly traced to specific products or services.

What Is Activity-Based Costing?

Activity-based costing refers to allocating costs based on the activities involved in producing a product or offering a service. This method is used when multiple activities are involved in creating a product or service.

Why Is Cost Allocation Important for Businesses?

Cost allocation is essential for businesses as it helps them understand the costs associated with each business area and make informed pricing, production, and resource allocation decisions. This leads to improved profitability and better resource allocation.

How Does Cost Allocation Impact Resource Allocation?

Cost allocation helps companies determine the costs associated with each department, product, or service, which are used to allocate resources more efficiently. By allocating resources based on accurate cost

How Does Cost Allocation Impact Pricing Decisions?

Cost allocation helps companies understand the costs associated with each product or service used to make informed pricing decisions. By accurately determining the cost of goods or services, companies can ensure that their pricing is based on a solid understanding of the costs involved.

The Comprehensive Guide to Cost Allocation in Accounting – Conclusion

Allocation of costs is a critical component of any business. By allocating costs, you can ensure that your company makes the best use of its resources and operates efficiently.

The ability to allocate costs allows you to make strategic decisions about your business’s operations and management and take appropriate actions regarding financial reporting.

The Comprehensive Guide to Cost Allocation in Accounting – Recommended Reading

Corporate Accountant: What Are the Responsibilities, Duties, & Salary of a Corporate Accountant?

How Can Business Intelligence Help with Budget Planning (in 2023)

Standard Costing- Common Problems (And How to Solve Them)

 Updated: 5/19/2023

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• Cost Classifications
• Relevant Cost of Material
• Manufacturing Overhead Costs
• Conversion Costs
• Quality Costs
• Revenue Expenditure
• Product Cost vs Period Cost
• Direct Costs and Indirect Costs
• Prime Costs and Conversion Costs
• Relevant vs Irrelevant Costs
• Avoidable and Unavoidable Costs
• Cost Allocation
• Joint Products
• Accounting for Joint Costs
• Service Department Cost Allocation
• Repeated Distribution Method
• Simultaneous Equation Method
• Specific Order of Closing Method
• Direct Allocation Method

Cost allocation is the process by which the indirect costs are distributed among different cost objects such as a project, a department, a branch, a customer, etc. It involves identifying the cost object, identifying and accumulating the costs that are incurred and assigning them to the cost object on some reasonable basis.

Cost allocation is important for both pricing and planning and control decisions. If costs are not accurately calculated, a business might never know which products are making money and which ones are losing money. If cost are mis-allocated, a business may be charging wrong price to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.

Cost allocation is a sub-process of cost assignment , which is the overall process of finding total cost of a cost object. Cost assignment involves both cost tracing and cost allocation. Cost tracing encompasses finding direct costs of a cost object while the cost allocation is concerned with indirect cost charge.

Steps in cost allocation process

Typical cost allocation mechanism involves:

• Identifying the object to which the costs have to be assigned,
• Accumulating the costs in different pools,
• Identifying the most appropriate basis/method for allocating the cost.

Cost object

A cost object is an item for which a business need to separately estimate cost.

Examples of cost object include a branch, a product line, a service line, a customer, a department, a brand, a project, etc.

A cost pool is the account head in which costs are accumulated for further assignment to cost objects.

Examples of cost pools include factory rent, insurance, machine maintenance cost, factory fuel, etc. Selection of cost pool depends on the cost allocation base used. For example if a company uses just one allocation base say direct labor hours, it might use a broad cost pool such as fixed manufacturing overheads. However, if it uses more specific cost allocation bases, for example labor hours, machine hours, etc. it might define narrower cost pools.

Cost driver

A cost driver is any variable that ‘drives’ some cost. If increase or decrease in a variable causes an increase or decrease is a cost that variable is a cost driver for that cost.

Examples of cost driver include:

• Number of payments processed can be a good cost driver for salaries of Accounts Payable section of accounting department,
• Number of purchase orders can be a good cost driver for cost of purchasing department,
• Number of invoices sent can be a good cost driver for cost of billing department,
• Number of units shipped can be a good cost driver for cost of distribution department, etc.

While direct costs are easily traced to cost objects, indirect costs are allocated using some systematic approach.

Cost allocation base

Cost allocation base is the variable that is used for allocating/assigning costs in different cost pools to different cost objects. A good cost allocation base is something which is an appropriate cost driver for a particular cost pool.

T2F is a university café owned an operated by a student. While it has plans for expansion it currently offers two products: (a) tea & coffee and (b) shakes. It employs 2 people: Mr. A, who looks after tea & coffee and Mr. B who prepares and serves shakes & desserts.

Its costs for the first quarter are as follows:

Total tea and coffee sales and shakes sales were $50,000 & $60,000 respectively. Number of customers who ordered tea or coffee were 10,000 while those ordering shakes were 8,000.

The owner is interested in finding out which product performed better.

Salaries of Mr. A & B and direct materials consumed are direct costs which do not need any allocation. They are traced directly to the products. The rest of the costs are indirect costs and need some basis for allocation.

Cost objects in this situation are the products: hot beverages (i.e. tea & coffee) & shakes. Cost pools include rent, electricity, music, internet and wi-fi subscription and magazines.

Appropriate cost drivers for the indirect costs are as follows:

Since number of customers is a good cost driver for almost all the costs, the costs can be accumulated together to form one cost pool called manufacturing overheads. This would simply the cost allocation.

Total manufacturing overheads for the first quarter are $19,700. Total number of customers who ordered either product are 18,000. This gives us a cost allocation base of $1.1 per customer ($19,700/18,000).

A detailed cost assignment is as follows:

Manufacturing overheads allocated to Tea & Cofee = $1.1×10,000

Manufacturing overheads allocated to Shakes = $1.1×8,000

by Irfanullah Jan, ACCA and last modified on Jul 22, 2020

Related Topics

• Cost Behavior

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Table of contents, cost: definition.

Cost is the sacrifice made that is usually measured by the resources given up to achieve a particular purpose. It is a sacrifice made in order to obtain some goods or services.

• Costs are not always expenses
• Some costs are assets, others are expenses
• Expenses are expired (used up) costs

Eventually, costs will become expenses.

Cost: Explanation

Cost measurement and allocation are significant aspects of financial and management accounting . Cost measurement and allocation techniques are used not only to assign incurred costs to products or services but also to plan future activities.

In accounting , the term cost has a variety of meanings. Furthermore, various cost concepts and measurement techniques are needed for internal planning and control.

The purpose of this article is to analyze the cost classifications and behavior patterns that are widely used in management accounting . Such an analysis will help management accountants when supplying information for planning and decision-making purposes.

Types of Cost

Cost can be defined as the amount (measured in terms of money) paid for goods and services received (or to be received).

Accountants and managers use many different concepts of cost, each usually for a different purpose. It is the classification of cost that indicates to managers how the term is being used and whether they can do anything about the cost or not.

Important types of costs are explained below.

Product Cost

Product costs are assigned to goods either purchased or manufactured for resale; they are incurred to produce or purchase a product. Product costs are initially identified as part of the inventory on hand.

Inventoriable Cost

Inventoriable cost is another name for product cost. It is stored as the cost of inventory until the goods are sold. Inventoriable costs become expenses ( cost of goods sold ) when the product is sold.

Period Cost

Period costs are expensed during the time period in which they are incurred. They are costs that are treated as expenses of the period in which the costs are incurred.

An expense refers to the consumption of assets for the purpose of generating revenue .

Direct Cost

A direct cost is a cost that can be traced to specific segments of operations.

Indirect Cost

An indirect cost is a cost that cannot be identified with specific segments of operations. Common costs are shared by multiple segments.

Example Segments = Plastic chairs (P) & Wood chairs (W)

Manufacturing Cost

Product costs consist of:

• Direct material (DM)
• Direct labor (DL)
• Manufacturing overhead (MOH, OH)

The formula for manufacturing cost is the following:

Manufacturing costs = DM + DL + MOH

Direct material (DM): Raw materials that are physically incorporated into the finished product.

Direct labor cost: The cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products.

Manufacturing overhead: Manufacturing costs other than direct material and direct labor costs.

• Indirect material These are required for the production process but do not become an integral part of the finished product.
• Indirect labor Indirect labor refers to the cost of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process.

Conversion Cost

Conversion costs are direct labor costs plus manufacturing overhead costs.

These are the costs of direct material and direct labor.

Non-manufacturing Cost

Period costs (expenses) incurred in and due to administrative activities.

Variable Cost

A variable cost changes in direct proportion to a change in the level of activity.

Fixed costs do not change in total as activity changes.

Marginal Cost

Marginal costs are additional costs incurred in producing extra units.

Incremental Cost

These types of costs are the difference between costs for the corresponding items under each alternative being considered.

For example, incremental cost increasing output from $1 000 to $1 100 units per week is the additional cost of producing an extra 100 units per week.

Difference Between Marginal and Incremental Cost

The main difference is that marginal cost represents the additional cost of one extra unit of output, whereas incremental cost represents the additional cost resulting from a group of additional units of output.

These costs are created decisions made in the past that cannot be changed by any decision that will be made in the future. Written down values of any asset previously purchased are an example of sunk costs.

Opportunity Cost

This cost refers to the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up. Notably, opportunity cost only applies to resources that have some alternative uses.

If no alternative use of resources exists, then the opportunity cost is zero.

Cost of Goods Sold

This is the expense measured by the cost of the finished goods sold during a specific period.

Work in Process

Partially completed products that are not yet ready for sale.

Finished Goods

Completed goods available for sale .

Elements of Cost

The elements of cost are categorized under:

• Factory overhead

1. Materials

These are the principal substances used in production.

Materials are transformed into finished goods through the addition of labor and factory overhead. The cost of materials may be divided into direct and indirect materials as follows:

( a) Direct Materials

Direct materials are those that can be identified in the product, which can be conveniently measured and directly charged to the product.

Direct materials can be identified with the product, easily traced, and represent a major material cost associated with producing the product. Examples of direct materials include wood in furniture, iron in fans, clay in bricks, leather in shoes, and wheat in flour.

(b) Indirect Materials

All materials involved in the production of a product that are not direct materials are indirect materials.

For example, nails and glue used in the manufacturing of a table are examples of indirect materials. In other words, indirect materials cannot be directly identified.

Labor is the physical or mental effort expended in the production of a product. Labor costs may be divided into direct and indirect labor as follows:

(a) Direct Labor

Direct labor is all labor directly involved in producing a finished product; that represents a major labor cost of producing the product. The work of machine operators in a manufacturing concern would be considered direct labor.

(b) Indirect Labor All labor involved in producing a product that is not considered direct labor is classed as indirect labor. For example, the work of a plant supervisor in a manufacturing concern would be considered indirect labor.

3. Factory Overhead

Factory overhead refers to all costs other than direct materials and the direct labor required to produce a product. This follows from the fact that the cost of any product equals the cost of direct materials, direct labor, and factory overhead.

Indirect materials and indirect labor are also included in factory overhead. This is because they can not be identified with a specific product.

Other examples of factory overhead costs, aside from indirect materials and indirect labor, include rent, utility bills, and depreciation of factory equipment.

Factory overhead costs can be further classified as fixed, variable, and semi-variable costs . By grouping the above elements of cost, the following equations showing the relationships between costs are obtained:

• Prime cost = Direct material + Direct labor
• Conversion cost = Direct labor + Factory overhead
• Factory cost = Direct materials + Direct labor + Factory overhead

What is a cost?

What are the types of cost.

Cost can be defined as the amount paid for goods and services received. Important types of costs includes:- product cost- inventoriable cost - period cost - expense cost - direct cost - indirect cost - manufacturing cost - conversion cost - prime cost - non-manufacturing cost- variable cost - fixed cost - marginal cost - incremental cost - sunk cost - opportunity cost - work in process - finished goods

What is the difference between a marginal and a incremental cost?

What are the elements of a cost.

The elements of cost are categorized under:- material (the principal substances used in production)- labor (the physical or mental effort expended in the production of a product)- factory overhead (refers to all costs other than direct materials and the direct labor required to produce a product)

What are the equations under the elements of a cost that shows the relationships between costs obtained?

By grouping the above elements of cost, the following equations showing the relationships between costs are obtained: 1. Prime cost = direct material + direct labor 2. Conversion cost = direct labor + factory overhead 3. Factory cost = direct materials + direct labor + factory overhead

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

Related Topics

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Cost Accumulation: Meaning, Types, and More

Cost accumulation: meaning.

Cost Accumulation is the process of collecting all costs information about the business with the help of the cost accounting system . It is a process of collection of all relevant data regarding the various costs incurred by the company at various stages of production. This calculation is the result or outcome of the cost accounting system prevalent or practices in the company.

Cost Accumulation calculates all manufacturing costs in a sequential pattern. It considers all costs in the production process, starting from inventory to the finished goods. The focus and the objective are to come up with the cost of a particular product or service by identifying various cost objects and their respective cost drivers . Here there exists a cause-effect relationship between cost object and their cost drivers. Thus Cost Accumulation becomes a very connected and integral part of the Cost Accounting System.

Whether Cost Accumulation a part of Managerial accounting too?

Job costing system, assumptions of process costing system, hybrid costing system, difference between job costing and process costing, cost accumulation vs cost assignment vs cost tracing.

The management of the company, after collecting and analyzing the cost data, makes calculative decisions regarding the day-to-day working of the company. The costing data helps the management at all stages of operations, including planning, monitoring, controlling, and decision making. The management also decides when and how the assignment of cost to a particular job or process will happen. And thus, Cost Accumulation becomes a part of both Cost Accounting and Managerial Accounting.

Types of Cost Accumulation

There are majorly three types of Cost Accumulation methods, as follows:-

Job Costing System is most useful when the total production quantity is small or there exist small batches of production. It is also relevant and important when each job is unique. It is a process of accumulating cost information about a particular project or a specific production or product. Under this system, linking and recording the accumulation of direct labor, direct materials, and manufacturing overhead costs happens with respect to the particular job or batch.

Also Read: Types of Costing

This system is widely useful in the delivery of a special or customized product. It also helps while asking for cost- reimbursements or stage-wise advances from the customer. Once the job completion happens, all the costs of the respective job are accumulated. And after that, that particular job sheet and costing exercise on that job also close. It is necessary to consider both direct and indirect costs under this system. At times calculation of indirect costs for a particular job may become difficult.

Thus under the Job Costing System, accumulation takes place according to the respective job order.

Process Costing System

Accumulation of cost through the Process Costing System occurs when the production of a huge amount of identical goods occurs. In this system, the accumulation of costs for a large batch of products takes place. And afterward, further allocation of all such accumulated costs takes place for an individual unit.

Process Costing System accumulates costs on the basis of departments or divisions. In this system, identification and booking of costs to respective cost centers take place. Cost centers are the places of origination of the costs. Accumulation of costs takes place according to the cost centers they belong to.

This method is best suitable when the production is very large in quantity. The production process is also generally continuous in nature without any customization.

Also Read: Cost Accounting Systems – Meaning, Importance And More

• The first assumption is that all products are identical in nature.
• The second assumption of this system is that the costs of all units of production are the same.

At the end of this process, the creation of a ‘Cost of Production Report’ takes place. This report shows the total cost for a particular cost center and the state of both opening and closing inventory. 

Manufacturing units where some production is large while some are small, this is best suitable. Under Hybrid Costing System, process costing is used where the production quantities are large. While if the product is in small batches, the Job System is used. Thus this hybrid system is widely used and now well accepted in such circumstances.

The key differences between both this system of cost accumulation and accounting are:

Sometimes, both Cost Assignment and Cost Accumulation are loosely called and referred to as the same. But it is not so, and they both are different. Cost Assignment is the identification and attachment of costs to the respective costs driver. It is a process of linking costs to their place of origin. Cost Assignment is mainly useful for an activity-based costing method, where linking of overhead expenses occurs where incurrence takes place of these overheads. Cost Allocation is the other name of Cost Assignment.

On the other hand, Cost Accumulation is a completely different concept. And here, the focus and objective are to collect all costs/total costs of that product or service. It is to know the overall cost of production and stages of the cost incurred and analyze this information about the costs for further management decisions. In this system, the process begins with recognizing cost objects and their respective cost drivers.

Cost Tracking is the third term here, which is useful in assigning costs to the departments. Cost Assignment and Cost Tracking helps in the Allocation of costs to the respective department. Thus the main focus of Cost Tracking is to trace back the origin of indirect costs and also establish a causal relationship with the cost driver.  

In simple words, Cost Assignment and Cost Tracking helps in the allocation of costs, and Cost accumulation helps in the collection of costs.

Cost Accumulation is an important step in the cost accounting process. Moreover, accumulating the costs according to the cost object and its drivers is the base of all other cost accounting processes. And the decision is with the management whether to adopt a Job, Process, or Hybrid Costing System. Moreover, it is of vital importance to accumulate costs without any error. Because all further processes are dependent on the accuracy of these figures. Thus Cost Accumulation is one of the important tools for the management of the company to guide and help them in making correct decisions.

Refer to Costing Terms for various other basic cost concepts.

RELATED POSTS

• Cost Accounting and Management Accounting
• Types of Costs and their Classification
• Cost Hierarchy – Meaning, Levels and Example
• Cost Object – Meaning, Advantages, Types and More
• Job Costing – Meaning, Benefits, Process and More
• Types of Cost Accounting

Sanjay Bulaki Borad

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Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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What Is Cost Accounting?

Understanding cost accounting.

• Cost vs. Financial Accounting
• Cost Accounting FAQs

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Cost Accounting: Definition and Types With Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

• Accounting Explained With Brief History and Modern Job Requirements
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Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant , and can only be used for internal purposes.

Key Takeaways

• Cost accounting is used internally by management in order to make fully informed business decisions.
• Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of management.
• As such, cost accounting cannot be used on official financial statements and is not GAAP-compliant.
• Cost accounting considers all input costs associated with production, including both variable and fixed costs.
• Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

Investopedia / Theresa Chiechi

Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting , each performing its own function for the accountant.

Types of Costs

• Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
• Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up its floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
• Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
• Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
• Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

Cost Accounting vs. Financial Accounting

While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements , which include information about its revenues , expenses , assets , and liabilities . Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.

One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as  generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.

Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company's true costs. 

Types of Cost Accounting

Standard costing.

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and the actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which refer to any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers , and they are the measures used as the basis for allocating overhead costs .

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line employees who will then account for the amount of time they spend on different tasks. The costs of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly the time and money are being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor-intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing  and lean-focused performance measurements. Financial decision-making is based on the impact on the company's total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The  break-even point —which is the production level where total revenue for a product equals total expense —is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin , calculated as the sales revenue minus variable costs, can also be calculated on a per-unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.

History of Cost Accounting

Scholars believe that cost accounting was first developed during the  industrial revolution  when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature on business management.

How Does Cost Accounting Differ From Traditional Accounting Methods?

In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement  cost controls . Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.

Why Is Cost Accounting Used?

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.

Which Types of Costs Go Into Cost Accounting?

These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.

What Are Some Advantages of Cost Accounting?

Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the  Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.

What Are Some Drawbacks of Cost Accounting?

Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled  accountants  and  auditors  are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.

Cost accounting is an informal set of flexible tools that a company's managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. These are meant to be internal metrics and figures only. Since they are not GAAP-compliant, cost accounting cannot be used for a company's audited financial statements released to the public.

Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review , vol. 46, no. 3, 1993, pp. 503-517.

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How to Do a Cost-Benefit Analysis & Why It’s Important

• 05 Sep 2019

Are you unsure whether a particular decision is the best one for your business? Are you questioning whether a proposed project will be worth the effort and resources that will go into making it a success? Are you considering making a change to your business, marketing, or sales strategy, knowing that it might have repercussions throughout your organization?

The way that many businesses, organizations, and entrepreneurs answer these, and other, questions is through business analytics —specifically, by conducting a cost-benefit analysis.

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What Is A Cost-Benefit Analysis?

A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Generally speaking, cost-benefit analysis involves tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision. (Sometimes, this value is represented as a ratio.)

If the projected benefits outweigh the costs, you could argue that the decision is a good one to make. If, on the other hand, the costs outweigh the benefits, then a company may want to rethink the decision or project.

There are enormous economic benefits to running these kinds of analyses before making significant organizational decisions. By doing analyses, you can parse out critical information, such as your organization’s value chain or a project’s ROI .

Cost-benefit analysis is a form of data-driven decision-making most often utilized in business, both at established companies and startups . The basic principles and framework can be applied to virtually any decision-making process, whether business-related or otherwise.

Related: 5 Business Analytics Skills for Professionals

Steps of a Cost-Benefit Analysis

1. establish a framework for your analysis.

For your analysis to be as accurate as possible, you must first establish the framework within which you’re conducting it. What, exactly, this framework looks like will depend on the specifics of your organization.

Identify the goals and objectives you’re trying to address with the proposal. What do you need to accomplish to consider the endeavor a success? This can help you identify and understand your costs and benefits, and will be critical in interpreting the results of your analysis.

Similarly, decide what metric you’ll be using to measure and compare the benefits and costs. To accurately compare the two, both your costs and benefits should be measured in the same “common currency.” This doesn’t need to be an actual currency, but it does frequently involve assigning a dollar amount to each potential cost and benefit.

2. Identify Your Costs and Benefits

Your next step is to sit down and compile two separate lists: One of all of the projected costs, and the other of the expected benefits of the proposed project or action.

When tallying costs, you’ll likely begin with direct costs , which include expenses directly related to the production or development of a product or service (or the implementation of a project or business decision). Labor costs, manufacturing costs, materials costs, and inventory costs are all examples of direct costs.

But it’s also important to go beyond the obvious. There are a few additional costs you must account for:

• Indirect costs: These are typically fixed expenses, such as utilities and rent, that contribute to the overhead of conducting business.
• Intangible costs: These are any current and future costs that are difficult to measure and quantify. Examples may include decreases in productivity levels while a new business process is rolled out, or reduced customer satisfaction after a change in customer service processes that leads to fewer repeat buys.
• Opportunity costs: This refers to lost benefits, or opportunities, that arise when a business pursues one product or strategy over another.

Once those individual costs are identified, it’s equally important to understand the possible benefits of the proposed decision or project. Some of those benefits include:

• Direct: Increased revenue and sales generated from a new product
• Indirect: Increased customer interest in your business or brand
• Intangible: Improved employee morale
• Competitive: Being a first-mover within an industry or vertical

3. Assign a Dollar Amount or Value to Each Cost and Benefit

Once you’ve compiled exhaustive lists of all costs and benefits, you must establish the appropriate monetary units by assigning a dollar amount to each one. If you don’t give all the costs and benefits a value, then it will be difficult to compare them accurately.

Direct costs and benefits will be the easiest to assign a dollar amount to. Indirect and intangible costs and benefits, on the other hand, can be challenging to quantify. That does not mean you shouldn’t try, though; there are many software options and methodologies available for assigning these less-than-obvious values.

4. Tally the Total Value of Benefits and Costs and Compare

Once every cost and benefit has a dollar amount next to it, you can tally up each list and compare the two.

If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.

Beyond simply looking at how the total costs and benefits compare, you should also return to the framework established in step one. Does the analysis show you reaching the goals you’ve identified as markers for success, or does it show you falling short?

If the costs outweigh the benefits, ask yourself if there are alternatives to the proposal you haven’t considered. Additionally, you may be able to identify cost reductions that will allow you to reach your goals more affordably while still being effective.

Related: Finance vs. Accounting: What's the Difference?

Pros and Cons of Cost-Benefit Analysis

There are many positive reasons a business or organization might choose to leverage cost-benefit analysis as a part of their decision-making process. There are also several potential disadvantages and limitations that should be considered before relying entirely on a cost-benefit analysis.

Advantages of Cost-Benefit Analysis

A data-driven approach.

Cost-benefit analysis allows an individual or organization to evaluate a decision or potential project free of biases. As such, it offers an agnostic and evidence-based evaluation of your options, which can help your business become more data-driven and logical.

Makes Decisions Simpler

Business decisions are often complex by nature. By reducing a decision to costs versus benefits, the cost-benefit analysis can make this dilemma less complex.

Uncovers Hidden Costs and Benefits

Cost-benefit analysis forces you to outline every potential cost and benefit associated with a project, which can uncover less-than-obvious factors like indirect or intangible costs.

Limitations of Cost-Benefit Analysis

Difficult to predict all variables.

While cost-benefit analysis can help you outline the projected costs and benefits associated with a business decision, it’s challenging to predict all the factors that may impact the outcome. Changes in market demand, material costs, and the global business environment are unpredictable—especially in the long term.

Incorrect Data Can Skew Results

If you’re relying on incomplete or inaccurate data to finish your cost-benefit analysis, the results of the analysis will follow suit.

Better Suited to Short- and Mid-Length Projects

For projects or business decisions that involve longer timeframes, cost-benefit analysis has a greater potential of missing the mark for several reasons. For one, it’s typically more difficult to make accurate predictions the further into the future you go. It’s also possible that long-term forecasts won’t accurately account for variables such as inflation, which can impact the overall accuracy of the analysis.

Removes the Human Element

While a desire to make a profit drives most companies, there are other, non-monetary reasons an organization might decide to pursue a project or decision. In these cases, it can be difficult to reconcile moral or “human” perspectives with the business case.

In the end, cost-benefit analysis shouldn't be the only business analytics tool or strategy you use in determining how to move your organization into the future. Cost-benefit analysis isn’t the only type of economic analysis you can do to assess your business’s economic state, but a single option at your disposal.

Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market.

This post was updated on July 12, 2022. It was originally published on September 5, 2019.

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Fact-checking Biden and Trump's claims at the first debate

Forget alternative facts and political spin: Thursday's presidential debate was more like a tsunami of falsity.

Former President Donald Trump unleashed a torrent of misinformation on topics from terrorism to taxes during the first debate of the 2024 general election, while President Joe Biden flubbed figures and facts about military deaths and insulin prices.

More than a dozen NBC News reporters, editors and correspondents fact-checked the key claims the presidential candidates made Thursday night. Here they are by topic:

Economy, trade and health care

Fact check: did biden inherit 9% inflation.

“He also said he inherited 9% inflation. Now, he inherited almost no inflation, and it stayed that way for 14 months, and then it blew up under his leadership,” Trump said about Biden.

This is false.

The inflation rate when Biden took office in January 2021 wasn’t 9%. It was 1.4%. It has risen on his watch, peaking at about 9.1% in June 2022, but by last month it had come down to 3.3%. Pandemic-related stimulus policies put in place by both Trump and Biden were blamed, in part, for the rise in the inflation rate.

Fact check: Did Biden lower the cost of insulin to $15 a shot?

“We brought down the price of prescription drugs, which is a major issue for many people, to $15 for an insulin shot — as opposed to $400,” Biden said.

Biden capped the cost of insulin at $35 a month under Medicare, not $15 a shot, and some drug companies have matched that cap. The price cap doesn’t apply to everyone , however. 

What’s more, Biden’s also significantly overstating how much insulin cost before the change. A 2022 report by the Department of Health and Human Services found that patients using insulin spent an average of $434 annually on insulin in 2019 — not $400 a shot.

Fact check: Did Trump lower the cost of insulin?

Trump claimed credit for lowering the cost of insulin for seniors, saying, “I am the one who got the insulin down for the seniors.”

That is mostly false.

In 2020, Trump created a voluntary program under Medicare Part D. The program allowed Medicare Part D plans to offer some insulin products for no more than $35 per month. It was active from 2021 to 2023, with fewer than half of the plans participating each year. 

In 2022, Biden signed the Inflation Reduction Act, which included a provision that lowered the out-of-pocket cost for people on Medicare to $35 a month and covered all insulin products. The cap didn’t apply to those with private insurance. However, after the law was implemented, insulin manufacturers voluntarily lowered the out-of-pocket cost to $35 a month for people with private insurance.

Fact check: Does Biden want to raise ‘everybody’s taxes’ by four times?

“Nobody ever cut taxes like us. He wants to raise your taxes by four times. He wants to raise everybody’s taxes by four times,” Trump claimed. “He wants the Trump tax cuts to expire.”

Biden’s tax plan “holds harmless for 98% of households,” said Kyle Pomerleau, senior fellow at the conservative American Enterprise Institute. And Biden wants to extend the majority of the Trump tax cuts, too, though he has advocated for hiking taxes on very high earners.

Fact check: Biden said the U.S. trade deficit with China is at its lowest since 2010

“We are at the lowest trade deficit with China since 2010,” Biden said.

This is true.

The U.S. had $279 billion more in imports than exports to China last year, the lowest trade deficit with the world’s second-largest economy since 2010. The highest deficit in recent years was $418 billion, in 2018, when Trump began a trade war with China. 

The decline has been driven largely by tariffs that Trump imposed in office and that Biden has maintained and in some cases expanded.

Fact check: Are immigrants taking ‘Black jobs’?

Asked about Black voters who are disappointed with their economic progress, Trump claimed Black Americans are losing their jobs because of illegal border crossings under Biden’s administration.

“The fact is that his big kill on the Black people is the millions of people that he’s allowed to come through the border. They’re taking Black jobs now,” Trump said.

There’s no evidence that undocumented immigrants are taking jobs away from Black Americans. In fact, according  to the Bureau of Labor Statistics , the Black unemployment rate fell to 4.8% in April 2023 — an all-time low. Before that, the Black unemployment rate was as high as 10.2% in April 2021.

Immigration

Fact check: did trump end catch and release.

“We ended ‘catch and release,’” Trump said.

Trump did not end “catch and release,” a term used to describe the practice of releasing migrants into the country with court dates while they await court hearings. The U.S. doesn’t have enough facilities to detain every migrant who crosses the border until they can see judges, no matter who is president, so Trump — like Barack Obama before him and Biden after him — released many migrants back into the U.S.

Fact check: Did the Border Patrol union endorse Biden?

“By the way, the Border Patrol endorsed me, endorsed my position,” Biden said.

The National Border Patrol Council, the labor union for U.S. Border Patrol agents and staff members, has endorsed Trump. 

“The National Border Patrol Council has proudly endorsed Donald J. Trump for President of the United States,” the group’s vice president, Hector Garza, said in a statement shared exclusively with NBC News. 

The union posted on X , “to be clear, we never have and never will endorse Biden.”

Biden may have been referring to a Senate immigration bill that he backed, which earned the union’s endorsement .

Fact check: Did Trump have ‘the safest border in the history of our country’?

“We had the safest border in the history of our country,” Trump said.

It’s a clear exaggeration. In 2019, the last year before the Covid-19 pandemic brought down border crossings, there were roughly 860,000 illegal border crossings, far more than in any year during the Obama administration.

Fact check: Trump says Biden is allowing ‘millions’ of criminals to enter U.S.

“I’d love to ask him … why he’s allowed millions of people to come in from prisons, jails and mental institutions to come into our country and destroy our country,” Trump said.

There is no evidence of this.

Venezuela doesn’t share law enforcement information with U.S. authorities, making it very hard to verify criminal histories of immigrants coming to the U.S. But there’s no evidence that Venezuela is purposefully sending “millions” of people from mental institutions and prisons to the U.S.

Fact check: Did Virginia’s former governor support infanticide?

“They will take the life of a child in the eighth month, the ninth month and even after birth. After birth. If you look at the former governor of Virginia, he was willing to do so, and we’ll determine what we do with the baby. Meaning we’ll kill the baby. ... So that means he can take the life of the baby in the ninth month and even after birth. Because some states, Democrat-run, take it after birth. Again, the governor, the former Virginia governor, put the baby down so that we decide what to do with it. He’s willing to, as we say, rip the baby out of the womb in the ninth month and kill the baby. Nobody wants that to happen, Democrat or Republican; nobody wants it to happen,” Trump said.

While some Democrats support broad access to abortion regardless of gestation age, infanticide is illegal, and no Democrats advocate for it. Just 1% of abortions are performed after 21 weeks’ gestation, according to the Centers for Disease Control and Prevention .

Trump first made the claim in 2019, after Virginia’s governor at the time, Ralph Northam, made controversial remarks in discussing an abortion bill. NBC News debunked the claim then, reporting that Northam’s remarks were about resuscitating infants with severe deformities or nonviable pregnancies. 

Asked on a radio program what happens when a woman who is going into labor desires a third-trimester abortion, Northam noted that such procedures occur only in cases of severe deformities or nonviable pregnancies. He said that in those scenarios, “the infant would be resuscitated if that’s what the mother and the family desired, and then a discussion would ensue between the physicians and the mother.”

Terrorism, foreign policy and the military

Fact check: trump said there was ‘no terror’ during his tenure.

“That’s why you had no terror, at all, during my administration. This place, the whole world, is blowing up under him,” Trump said.

There were two ISIS-inspired terrorist attacks while Trump was president. The first occurred in October 2017, when Sayfullo Saipov killed eight people and injured a dozen more in a vehicle ramming attack on the West Side Highway bike path in New York City. The second occurred in December 2017, when Akayed Ullah injured four people when he set off a bomb strapped to himself.

Fact check: Biden suggests no troops died under his watch

“The truth is I’m the only president this century that doesn’t have any this decade and any troops dying anywhere in the world like he did,” Biden said.

The Defense Department confirmed that 13 U.S. service members were killed in a suicide bombing attack at Abbey Gate at the Kabul airport by a member of ISIS-K as the U.S. was leaving Afghanistan. 

Environment

Fact check: did trump have the ‘best environmental numbers ever’.

“During my four years, I had the best environmental numbers ever, and my top environmental people gave me that statistic just before I walked on the stage, actually,” Trump said.

The figure Trump is referring to is the fact that carbon emissions fell during his administration. He posted the talking points his former Environmental Protection Agency chief emailed him on social media before the debate.

And it’s true that carbon emissions are falling — they have been dropping for years. Emissions particularly plunged in 2020, dropping to levels around those in 1983 and 1984. That drop was in large part thanks to Covid lockdowns, and emissions rose again when air travel and in-person working resumed. 

Still, climate activists and experts are quick to note that those drops are nowhere near enough to head off predicted catastrophic effects of global warming. Other major countries cut their emissions at a much faster rate during the Trump administration.

Fact check: The Jan. 6 crowd was not ‘ushered in’ by the police

“If you would see my statements that I made on Twitter at the time and also my statement that I made in the Rose Garden, you would say it’s one of the strongest statements you’ve ever seen. In addition to the speech I made in front of, I believe, the largest crowd I’ve ever spoken to, and I will tell you, nobody ever talks about that. They talk about a relatively small number of people that went to the Capitol and, in many cases, were ushered in by the police. And as Nancy Pelosi said, it was her responsibility, not mine. She said that loud and clear,” Trump said.

During a lengthy answer to a question about whether he would accept the result of the 2024 election and say all political violence is unacceptable, Trump made several false statements, including the claim that police “ushered” rioters into the U.S. Capitol and that then-House Speaker Nancy Pelosi, D-Calif., said it was her responsibility to keep the chamber safe. 

Video and news reports of the Jan. 6 riots clearly captured the U.S. Capitol under attack by pro-Trump crowds who overran the law enforcement presence around and inside the complex. 

On Pelosi, Trump was most likely referring to video shot by Pelosi’s daughter Alexandra for an HBO documentary that showed her during the events of Jan. 6, 2021, tensely wondering how the Capitol was allowed to be stormed.

“We have responsibility, Terri,” Pelosi tells her chief of staff, Terri McCullough, as they leave the Capitol in a vehicle. “We did not have any accountability for what was going on there, and we should have. This is ridiculous.”

“You’re going to ask me in the middle of the thing, when they’ve already breached the inaugural stuff, ‘Should we call the Capitol Police?’ I mean the National Guard. Why weren’t the National Guard there to begin with?” Pelosi says in the video. 

“They clearly didn’t know, and I take responsibility for not having them just prepare for more,” she says. 

Many allies of Trump have tried for the more than three years since the riots to paint Pelosi as somehow being responsible for the violence. Some Trump-backing Republicans have, for example, falsely claimed that she blocked the National Guard from going to the Capitol during the riots.

And everything else ...

Fact check: trump skipped world war i cemetery visit because the soldiers who died were ‘losers’.

Biden said that Trump “refused to go to” a World War I cemetery and that “he was standing with his four-star general” who said Trump said, “I don’t want to go in there, because they’re a bunch of losers and suckers.”

In 2018, during a trip to France, Trump canceled a visit to an American cemetery near Paris, blaming weather for the decision. 

But in September 2020, The Atlantic reported that Trump had axed the visit because he felt that those who’d lost their lives and been buried there were “losers.” The magazine cited “four people with firsthand knowledge of those discussions.”

According to The Atlantic, Trump said: “Why should I go to that cemetery? It’s filled with losers.” In another conversation, The Atlantic reported, Trump said the 1,800 American Marines who died were “suckers.” 

Several media outlets confirmed the remarks, and Trump’s former White House chief of staff John Kelly also said those specific comments were true.

Fact check: Trump says Biden didn’t run for president due to 2017 Charlottesville rally

“He made up the Charlottesville story, and you’ll see it’s debunked all over the place. Every anchor has — every reasonable anchor has debunked it, and just the other day it came out where it was fully debunked. It’s a nonsense story. He knows that, and he didn’t run because of Charlottesville. He used that as an excuse to run,” Trump said about Biden.

The “Unite the Right” rally in Charlottesville, Virginia, in 2017 featured torch-bearing white supremacists marching to protest the removal of a Robert E. Lee statue and chanting racist slogans like “You will not replace us.” It turned deadly when a car plowed into a crowd .

In recent months, Trump has downplayed the violence, saying it was “nothing” compared to recent pro-Palestinian protests on university campuses.

Meanwhile, Biden has always pointed to Trump’s 2017 comments as the primary reason he decided to seek the presidency in 2020, including in his campaign announcement video back in April 2019 .

Jane C. Timm is a senior reporter for NBC News.

Julia Ainsley is the homeland security correspondent for NBC News and covers the Department of Homeland Security for the NBC News Investigative Unit.

Adam Edelman is a political reporter for NBC News.

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July 2024 dates for benefits and pensions after cost of living payments

The uk’s cost of living will be a major talking point in the run up to july’s general election, article bookmarked.

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The UK’s snap general election is only a few days away , with all the major parties sharing their plans to tackle the ongoing cost of living crisis.

Following the rampant inflation of the past few years, sky-high prices persist , as millions continue to struggle to pay their bills, afford the essentials or even keep a roof over their heads.

Inflation finally reached the Bank of England’s 2 per cent target in June – for the first time in three years. It is down from a peak of 11.1 per cent in October 2022.

While this is welcome economic news, declining inflation unfortuntely does not mean costs are going back to what they were previously, just that they have begun rising less fast.

The cost of living in the UK remains a major talking point, with all parties pitching their plans to get the UK’s economy back in shape and bring prices back to sustainable levels.

Recent research from the Joseph Rowntree Foundation shows that nearly a million people are only £10 away from poverty, while 3.2 million are just £40 clear. They have urged party leaders to commit more to tackling poverty in the country.

The government’s latest annual figures on low-income households paint a bleak picture of the UK’s economic situation. They show absolute poverty has increased for two years in a row, with nearly a million more people in poverty in 2022/23 than in 21/22.

Meanwhile, the Trussell Trust revealed in May that their food banks delivered 3.1 million emergency food parcels over the past year – the highest number in their history.

Against these difficult economic circumstances, here is an overview of the financial support available to low-income families this July and key dates for benefits recipients to look out for:

Benefits going out as usual

The usual benefits and pensions payments will be going out mostly as normal in July. These are:

• Universal Credit
• State pension
• Pension credit
• Child benefit
• Disability living allowance
• Personal independence payment
• Attendance allowance
• Carer’s allowance
• Employment support allowance
• Income support
• Jobseeker’s allowance

As there are no bank holidays in July, you can expect to receive your payments on the usual days.

The DWP has also issued a warning to 500,000 benefit claimants that they will soon need to take action as six ‘legacy benefits’ are replaced by Universal Credit.

For more information on how and when state benefits are paid, please visit the government’s website .

A report from Policy in Practice last year shows that nearly £19bn in benefits goes unclaimed a year – they offer a helpful calculator to work out what you might be entitled to.

Have you been affected by the issues in this story? Get in touch via email: [email protected]

Household support fund

In the spring Budget, Jeremy Hunt confirmed the Household Support Fund (HSF) would be extended for 6 months beyond the original 31 March deadline.

The HSF is funding given to all local councils to support vulnerable households in their area. Councils are free to allocate the funds however they feel is best.

For instance, some have provided cash grants, supermarket vouchers, or energy bill assistance. You will need to visit your local council’s website to find out what help may still be available.

To find out what support is available to you, the End Furniture Poverty charity offer a helpful assistance finder tool .

Other help available

Budgeting advance loans

The government offers a ‘budgeting advance loan’ for people on Universal Credit who face an emergency lack of money. Prior to the budget, the repayment period for these loans was 12 months. It has now been doubled to 2 years.

These loans are interest-free, and automatically deducted from Universal Credit payments. You can borrow an ‘advance’ of up to:

• £348 if you’re single
• £464 if you’re part of a couple
• £812 if you have children

Charitable grants

If you are struggling financially, you may be eligible for certain charitable grants. There are a wide range of grants available depending on your circumstances.

However, these grants will typically require you to meet specific criteria and only be able to offer limited funds.

Charitable grants are available for people who are disabled or ill, carers, bereaved, unemployed, students – and many more. The charity Turn2us has an online tool to search for grants which may be available to you.

Energy provider help

A number of energy suppliers offer help for those struggling with their energy bills. These include Scottish Power, EDF, E.ON and Octopus. It is worth contacting your energy provider to find out if you are eligible.

British Gas also offer a grant of up to £2,000 to customers of any energy provider . You will need to meet specific criteria to be eligible, and can apply on the British Gas Energy Trust website .

Council tax reduction

If you meet certain criteria or are on certain benefits, you may be able to apply for a discount on your council tax discount of up to 100 per cent.

Your local council may still be able to offer you a discretionary reduction if you are able to demonstrate you are facing severe hardship and can’t afford to pay your council tax.

To apply for a council tax reduction, you can contact your local council via the government’s website .

Up to 30 hours free childcare

All working parents in the UK are currently entitled to 30 hours of free childcare for children aged 3 to 4. From April 1, this entitlement will expand to include 15 hours of free childcare for 2-year-olds.

You must apply online and reconfirm your eligibility every three months, in time for each school term. Working parents can also apply for tax-free childcare, giving back 20p for every 80p you put towards childcare, up to a maximum of £500 a year.

There are two more expansions to free childcare planned in the coming years:

• September 2024 : All children from the age of nine months can receive 15 hours of free childcare.
• September 2025: All children under five can receive 30 hours of free childcare.

Energy Price Cap: Will it go down again in 2024?

The energy price cap dropped to £1,690 in April, down £238 from the January cap of £1,928.

Analysts at the trusted Cornwall Insight predict this figure will fall again in July to £1,559.61, but then rise slightly in October to £1,631.44.

The energy price cap is the maximum amount energy suppliers can charge you for each unit of energy if you’re on a standard variable tariff. That includes most households. It is expressed as an annual bill for an average home.

The recent decline in prices is reflective of recent drops in wholesale energy costs – the amount energy firms pay for their electricity and gas before supplying it to households.

Although it is a significant slide from the record-high rates of the last two years, the figure remains almost £1,000 a year above pre-pandemic levels.

How will the general election affect benefits and pensions?

There are likely to be some significant changes to benefits and pensions after July 4, whichever political party wins. However, any planned changes are unlikely to take effect straight away, with most going through consultation periods which can take months, or even years.

Labour has said it will review Universal Credit so that it “makes work pay and tackles poverty”. The party also wants to reform work capability assessments, alongside a plan to support disabled people to work.

The Conservatives have said they want to take “bold action” to reduce the number of people claiming benefits. This includes reforming disability benefits by changing how capability is assessed, looking at vouchers instead of cash payments, and introducing a new service to approve sick notes.

The party also says it will look at removing benefits entirely for people who refuse ‘suitable jobs’ after 12 months on benefits as well as accelerating the roll out of Universal Credit.

On pensions, prime minister Rishi Sunak has committed his party to a ‘triple lock plus’ pledge. This means that, as pensions continue to rise with the highest of either inflation, wage growth of 2.5 per cent, the tax-free allowance on them will rise too. Under this pledge, someone on the basic state pension will never pay tax on this income.

Labour have ruled out matching this pledge, calling it not ‘credible’ in light of the country’s economic situation. Instead, they have committed to a review of workplace pensions to ensure financial security in retirement.

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What it means for the Supreme Court to block enforcement of the EPA’s ‘good neighbor’ pollution rule

Emissions rise from smokestacks at the Jeffrey Energy Center coal power plant, near Emmett, Kan., Sept. 18, 2021. (AP Photo/Charlie Riedel, File)

The Supreme Court building is seen, Wednesday, June 26, 2024, in Washington. (AP Photo/Alex Brandon)

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WASHINGTON (AP) — The Environmental Protection Agency will not be able to enforce a key rule limiting air pollution in nearly a dozen states while separate legal challenges proceed around the country, under a Supreme Court decision Thursday.

The EPA’s “good neighbor” rule is intended to restrict smokestack emissions from power plants and other industrial sources that burden downwind areas with smog-causing pollution.

Three energy-producing states — Ohio, Indiana and West Virginia — challenged the rule, along with the steel industry and other groups, calling it costly and ineffective.

The Supreme Court put the rule on hold while legal challenges continue, the conservative-led court’s latest blow to federal regulations.

The high court, with a 6-3 conservative majority, has increasingly reined in the powers of federal agencies, including the EPA, in recent years. The justices have restricted EPA’s authority to fight air and water pollution, including a landmark 2022 ruling that limited EPA’s authority to regulate carbon dioxide emissions from power plants that contribute to global warming.

The court is also weighing whether to overturn its 40-year-old Chevron decision , which has been the basis for upholding a wide range of regulations on public health, workplace safety and consumer protections.

A look at the good neighbor rule and the implications of the court decision.

What is the ‘good neighbor’ rule?

The EPA adopted the rule as a way to protect downwind states that receive unwanted air pollution from other states. Besides the potential health impacts from out-of-state pollution, many states face their own federal deadlines to ensure clean air.

States such as Wisconsin, New York and Connecticut said they struggle to meet federal standards and reduce harmful levels of ozone because of pollution from out-of-state power plants, cement kilns and natural gas pipelines that drift across their borders.

Ground-level ozone, commonly known as smog, forms when industrial pollutants emitted by cars, power plants, refineries and other sources chemically react in the presence of sunlight. High ozone levels can cause respiratory problems, including asthma and chronic bronchitis. People with compromised immune systems, the elderly and children playing outdoors are particularly vulnerable.

Judith Vale, New York’s deputy solicitor general, told the court that for some states, as much as 65% of smog pollution comes from outside its borders.

States that contribute to ground-level ozone must submit plans ensuring that coal-fired power plants and other industrial sites do not add significantly to air pollution in other states. In cases where a state has not submitted a “good neighbor” plan — or where EPA disapproves a state plan — a federal plan is supposed to ensure downwind states are protected.

What’s next for the rule?

The Supreme Court decision blocks EPA enforcement of the rule and sends the case back to the U.S. Court of Appeals for the District of Columbia Circuit, which is considering a lawsuit challenging the regulation that was brought by 11 mostly Republican-leaning states.

An EPA spokesman said the agency believes the plan is firmly rooted in its authority under the Clean Air Act and “looks forward to defending the merits of this vital public health protection” before that appeals court.

The spokesman, Timothy Carroll, said the Supreme Court’s ruling will “postpone the benefits that the Good Neighbor Plan is already achieving in many states and communities.’'

While the plan is on pause, “Americans will continue to be exposed to higher levels of ground-level ozone, resulting in costly public health impacts that can be especially harmful to children and older adults,’' Carroll said. Ozone disproportionately affects people of color, families with low incomes, and other vulnerable populations, he said.

Rich Nolan, president and CEO of the National Mining Association, said he was pleased that the Supreme Court “recognized the immediate harm to industry and consumers posed by this reckless rule. No agency is permitted to operate outside of the clear bounds of the law and today, once again, the Supreme Court reminded the EPA of that fact.’'

With a stay in place, Nolan said the mining industry looks forward to making its case in court that the EPA rule “is unlawful in its excessive overreach and must be struck down to protect American workers, energy independence, the electric grid and the consumers it serves,.”

Few states participate

The EPA rule was intended to provide a national solution to the problem of ozone pollution, but challengers said it relied on the assumption that all 23 states targeted by the rule would participate. In fact, only about half that number of states were participating as of early this year.

A lawyer for industry groups that are challenging the rule said it imposes significant and immediate costs that could affect the reliability of the electric grid. With fewer states participating, the rule may result in only a small reduction in air pollution, with no guarantee the final rule will be upheld, industry lawyer Catherine Stetson told the Supreme Court in oral arguments earlier this year.

The EPA has said power-plant emissions dropped by 18% in 2023 in the 10 states where it has been allowed to enforce its rule, which was finalized last year . Those states are Illinois, Indiana, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania, Virginia and Wisconsin. In California, limits on emissions from industrial sources other than power plants are supposed to take effect in 2026.

The rule is on hold in another dozen states because of separate legal challenges. The states are Alabama, Arkansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Nevada, Oklahoma, Texas, Utah and West Virginia.

Administrative overstep or life-saving protection?

Critics, including Republicans and business groups, call the good neighbor rule an example of government overreach.

The EPA rule and other Biden administration regulations “are designed to hurriedly rid the U.S. power sector of fossil fuels by sharply increasing the operating costs, ... forcing the plants’ premature retirement,” Republican lawmakers said in a brief filed with the high court.

Supporters disputed that and called the “good neighbor’’ rule critical to address interstate air pollution and ensure that all Americans have access to clean air.

“Today’s move by far-right Supreme Court justices to stay commonsense clean air rules shows just how radical this court has become,’' said Charles Harper of environmental group Evergreen Action.

“The court is meddling with a rule that would prevent 1,300 Americans from dying prematurely every year from pollution that crosses state borders. We know that low-income and disadvantaged communities with poor air quality will bear the brunt of this delay,’' Harper said.

Roger Reynolds, senior legal director of the environmental group Save the Sound, said the decision hinders the EPA from protecting states such as Connecticut and New York that suffer from ozone pollution generated in the Midwest.

“We cannot reach healthy air quality for our residents without addressing upwind pollution, in addition to local sources,” Reynolds said.

The rule applies mostly to states in the South and Midwest that contribute to air pollution along the East Coast. Some states, such as Texas, California, Pennsylvania, Illinois and Wisconsin, both contribute to downwind pollution and receive it from other states.

Associated Press writer Susan Haigh in Hartford, Connecticut contributed to this story.

The first presidential debate is tonight. Here's how to watch on TV or streaming

If it feels early, that's because it is: The first debate of the 2024 presidential election against President Joe Biden and former President Donald Trump will take place on Thursday.

In mid-May, the Democratic and Republican front runners agreed to take part in a debate hosted by CNN, departing from the traditional debate procedure. The nominees are not participating in debates facilitated by the Commission on Presidential Debates .

CNN anchors Jake Tapper and Dana Bash will moderate the in-studio debate, with several networks planning to provide  commentary before and after  the big production. 

This year, there will be no live audience. So how can you watch the debate from your TV, laptop, tablet or phone?

When is the first presidential debate?

The upcoming presidential debate will begin at 8 p.m. Central time on Thursday, June 27. This is the earliest debate in U.S. history, which typically started in September or October, according to CNN .

How can I watch the presidential debate?

CNN will broadcast the debate on its cable channel. Other news channels will broadcast pre-debate commentary prior to the showing a simulcast of the CNN debate. Here are some of the broadcast networks that will air the debate live:

Can I watch the debate if I don't have cable?

Yes. A ‘CNN Presidential Debate’ Simulcast will be available on the Des Moines Register's website and on the  USA TODAY channel on YouTube .

If you have popular streaming apps, you can also find coverage there:

• Debate host CNN will provide its coverage on Max.
• ABC News will offer its coverage on Hulu.
• MSNBC coverage is available via Peacock.

When is the next presidential debate?

Biden and Trump also agreed to a debate hosted by ABC News on Sept. 10. The Commission on Presidential Debates planned to host its first debate on Sept. 16.

Reporting contributed by Sarah Gleason of USA TODAY.

Kate Kealey is a general assignment reporter for the Register. Reach her at  [email protected]  or follow her on Twitter at @ Kkealey17 .

Solar charges, new prices and government handouts mean your power bill will change from today

And so, the first day of the new financial year is in and Australia's armies of accountants and tax professionals are sharpening their pencils.

It's a time for so many of the wonderful things life has to offer — dusting off and unscrambling old receipts, trying to learn (again) how to use spreadsheets, and wondering where all the time went.

But it's also an important time of the year for your power bills.

You might not know it, but July 1 is arguably the key date on the calendar for Australia's energy industry, or at least its consumers.

This year in particular there are a few things happening, and they all have implications for how much you'll pay for power:

• New power prices come into effect;
• New government handouts kick in, and;
• There may be changes to how your solar is charged.

What's happening to power prices?

For about one-in-10 households, the new financial year has a direct and immediate effect on the price they pay for their power.

That's because July 1 marks the date new benchmark power prices come into force.

Almost 10 per cent of residential customers are on so-called default market offers, which are set by the Australian Energy Regulator for New South Wales, south-east Queensland and South Australia.

In Victoria, they're set by the Essential Services Commission.

While the default rates might only directly capture a smallish share of the market, they act as the barometer by which all other prices are set.

What's more, July 1 often marks the date on which retailers change new contract offers.

That's where the action really happens, given the vast majority of households are signed up to these market contracts.

Unlike the past couple of years, when benchmark prices uniformly rocketed during and in the aftermath of the 2022 energy crisis, there's a variety of new prices across the states this time around.

New South Wales, Victoria and South Australia will all see decreases in the benchmark price for electricity.

And it's nothing to be sneezed at for beleaguered consumers who have been smashed by higher costs of living on all fronts.

In Victoria, for example, the fall amounts to as much as 7 per cent — or $100 — compared with an annual bill last year.

On the flip side of this equation is Queensland, where households in the populous south-east corner of the state will get hit by another, albeit relatively modest, increase in prices.

For residential customers in south-east Queensland, reference prices will edge up 4.2 per cent — or $83 — on last year.

In Western Australia, prices charged to households by the state-owned power providers Synergy and Horizon will increase by 2.5 per cent.

Richard Foxworthy, the boss of energy savings website Bill Hero, said the modest changes either way would be welcome news to consumers battered by years of double-digit price hikes.

Still, Mr Foxworthy noted that while prices had shot up quickly during the "dark days" of the energy crisis, they were falling much slower despite a slump in the wholesale cost of energy.

"Wholesale prices have now unwound and are pretty much back to baseline and have been for quite some time," Mr Foxworthy said.

"Retail prices — surprise, surprise — have been much slower.

"So while we can expect to see some moderate price declines — that's what we're anticipating — prices are still high with a long-term view."

What are governments doing about it?

Amid the sustained high prices for electricity, governments are, to varying degrees, stepping in to try to cushion the pain.

Perhaps most notably, the federal government will be handing out $300 to almost every Australian household — noting that some households claim they will miss out for reasons such as not being connected to the grid.

It won't be cash in your hand.

Rather, the money will be automatically taken off your bill.

And it won't happen all at once.

Instead, the $300 will be deducted in $75 increments for every quarterly bill over a year.

But it's not just the Commonwealth that's showering the largesse.

In Queensland, where the state Labor government faces a bruising election in October after almost 10 years in office, households are being given an extraordinary $1,000 energy rebate.

The assistance, along with the handout from Canberra, means Queenslanders will be paying much less for their electricity this financial year even with the increase in underlying prices.

It's a similar story in Western Australia, where gushers of resources and GST money have enabled the state government to shell out $400 as a "credit" against every householder's power bill.

The latest giveaway marks the fourth year in a row in which the WA government has forked out in such a way, meaning average consumers in the state have been paying some of the lowest prices in the country.

Other states such as South Australia and Victoria, which had hefty rebates for the financial year that's just ended, have not extended that relief.

Mr Foxworthy said the handouts were a "sugar hit" that would no doubt be gladly received by consumers but he said the money could have been better used.

"It seems like a huge, missed opportunity," he said.

"If those funds could have been deployed towards helping people install better insulation, install more energy-efficient appliances, decarbonise their homes by replacing gas appliances with electric alternatives, those kinds of things.

"It's kind of like to give a man a fish or teach them how to fish.

"So, you know, thanks very much federal government, you've given us a nice fish. But that's not going to last us very long into the future."

What's this about solar panels?

Millions of Australians over the past 14 years have, to a certain extent, tried to take matters into their own hands by installing solar panels to cut their bills.

It's been a successful strategy for the most part thanks, at first, to generous state and federal incentives that encouraged people to adopt the technology.

More recently, the plunging costs of solar panels have enabled people to install ever larger systems on their roofs to maximise the power they can produce.

Those two trends, plus one or two other things besides, have driven an extraordinary boom in rooftop solar uptake across Australia, where more than one in every three homes has a system.

But with the rapid spread of so much solar has come some significant challenges.

And none is bigger than the proverbial tidal wave of rooftop solar output that crashes over the system in the middle of every day — a phenomenon that is threatening to overwhelm the low-voltage poles-and-wires network in some places at some times.

To deal with that phenomenon, things are changing this financial year.

From this month, solar households across much of New South Wales may well have to pay for the right to export some of their output in the middle of the day.

Under a change that was approved by the regulator, poles-and-wires distribution companies Ausgrid, Endeavour and Essential will apply what is known as two-way pricing.

It involves customers paying 1.2 cents for every kilowatt hour of electricity their solar panels put back into the grid during the sunniest hours of the day — between 10am and 3pm.

But there are a couple of caveats.

For starters, the charge only applies over a certain monthly threshold of solar exports ranging from 192 kilowatt-hours to 212kWh.

Also, it is not an outright charge but rather a deduction of the feed-in tariff a customer receives from their retailer.

Consumers can set limits on any exports via the inverters that connect their solar panels to the grid.

As well as this, those same households can be paid 2.3 cents per kWh if they can deliver electricity into the network when it badly needs the supply — between 4pm and 9pm.

At the moment, it appears to just be New South Wales homes affected by the change, although both South Australia and Queensland have indicated they could update their tariffs in 2025.

Victoria has so far resisted imposing such costs.

Even so, one reader told the ABC his solar panels exported as much as 750kWh into the grid during the height of summer, suggesting some customers could be on the hook for added costs all the same.

Either way, experts say the changing settings for solar tariffs — and tariffs more generally — show how it is becoming increasingly important to make better use of Australia's abundant daytime solar resources.

Finn Peacock, the founder of SolarQuotes, said the likes of two-way pricing — and export limits for certain types of big new systems — were a reflection of the remarkable success of Australia's solar industry.

Mr Peacock said there were now so many households with solar panels, they were capable of generating so much power that it was, in fact, pushing the distribution system to the edge of its capabilities at times.

He said the changes were relatively minor in the scheme of things, adding they would be more than offset by the benefits provided by solar.

"The problem they're trying to solve — and it's a good problem in my opinion — is that solar uptake has been so fast," Mr Peacock said.

"There's so much solar in the network that the network does struggle at times to take all of that energy.

"We do need to do something because if we don't, the network will break.

"So, doing nothing is not an option."

How do I get the best deal?

It's something of a cliche that consumers should shop around for the best deal if they want to minimise their power bills.

But, according to Mr Foxworthy of Bill Hero, it's also fundamentally true.

Mr Foxworthy said falling wholesale prices had set energy companies "back on the acquisition trail" for new customers.

Consequently, he said, they were throwing around offers to try to entice people across.

He said this latest acquisition spree was often taking the form of cash incentives rather than cheaper electricity.

His advice: take advantage of retailers' offers. And never be loyal.

"Our view is that incentives can actually be better for consumers because you get the benefit of that incentive up-front, typically," Mr Foxworthy said.

"If you switch to a new retailer, some of them are offering $300 incentives just to sign up, and they'll pay that out to you sometimes in the very first month that you're with them.

"So it's actually a realistic strategy to find a plan where the value is tied up in an incentive, sign up to that plan, pocket the incentive.

"It would give you typically one, two or three months more or less of free electricity while that incentive credit is being consumed.

"Then just switch again to some other plan, potentially another plan that has its own incentives."

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