Purposes of cost allocation The following sequential outline of the cost-allocation process helps students seethe big picture. 1 Determine the purpose of the allocation, since this determines what costs will be allocated. 2 Decide how to allocate the costs from step 1. To do sob ab Decide how many indirect-cost pools to develop, and then b Identify an allocation base (preferably a cost driver) for each cost pool. NB :Allocation bases chosen using a cause-and-effect criterion are most likely to be cost drivers of the costs in the indirect-cost pool.
