# Allocated Costs: Explained

## What is it, how to calculate it, formula, why it's important

Hey, fellow business enthusiasts! Today, I am going to spill the beans on one of the most confusing topics in the business world - allocated costs! Yes, I know, the phrase alone can send shivers down your spine, but trust me, by the end of this article, you'll be eager to allocate your costs like a pro!

First of all, let's define allocated costs. Simply put, they are indirect costs that are assigned or allocated to a particular product or service. These costs cannot be traced directly to the product or service but are incurred in the process of producing it.

Allocated costs are important because they help businesses determine the true cost of producing a product or service. By accurately allocating costs, businesses can make better decisions on pricing, resource allocation, and even strategic planning.

## Types of Allocated Costs

There are several types of allocated costs, but I'll focus on the most common ones:

Overhead costs are indirect costs that are not easily quantifiable. Examples of overhead costs include rent, utilities, insurance, and depreciation of equipment. These costs are difficult to allocate because they are shared among different products or services.

A common method of allocating overhead costs is by using a predetermined overhead rate. This rate is calculated by dividing the total overhead costs by the total amount of direct labor or machine hours used in production. The predetermined overhead rate is then applied to each product or service based on the number of labor or machine hours used in producing it.

Selling and administrative costs are indirect costs that are not related to the production process. Examples include salaries of sales and administrative staff, marketing expenses, and office supplies.

Allocating selling and administrative costs to products or services can be done by several methods, such as allocating them based on sales revenue, number of employees working on the product/service, or even the square footage used by the product/service.

## The Benefits of Accurately Allocating Costs

Accurately allocating costs has several benefits for businesses:

### Accurate Pricing

By allocating costs accurately, businesses can determine the true cost of producing a product or service. This information can be used to set prices that are competitive and profitable.

### Better Resource Allocation

Allocating costs can help businesses determine which products or services are more profitable and should receive more resources. It can also help businesses identify areas where costs can be reduced.

### Improved Strategic Planning

Allocating costs can help businesses make better decisions when planning for the future. By knowing the true cost of producing a product or service, businesses can make informed decisions on expansion, diversification, or even discontinuation of a product or service.

## Conclusion

Allocated costs may seem confusing, but they are an essential part of determining the true cost of producing a product or service. By accurately allocating costs, businesses can make better decisions on pricing, resource allocation, and strategic planning. So, don't be afraid to allocate your costs like a pro!

### Meta Description:

Allocated costs can be confusing, but by accurately allocating costs, businesses can make better decisions on pricing, resource allocation, and strategic planning. Learn more about allocated costs here!