C HAP TE R 5 Cost allocation Teaching tips and points to stress The terminology of cost allocation Emphasise that there is rarely one best way to allocate costs allocation requires judgement and reasonable people may differ in their judgements. In the absence of an ideal allocation, the object is to obtain a reasonable allocation and insight into the extent to which different judgements would affect the allocation (i.e. sensitivity analysis is appropriate. Cost tracing describes assignment of direct costs to the cost object. Cost allocation describes assigning indirect costs to the cost object. As a company produces a wider variety of products, more costs will be indirect (common to several products. However, advances in information technology have made it feasible to trace more costs directly to products.
