In cost allocation, what is typically used to distribute indirect costs?

Cost allocation involves distributing costs that cannot be directly traced to a specific cost object (such as a product, department, or project) to various cost objects. Using "a reasonable basis" for distributing indirect costs is crucial because it ensures that the allocation reflects the actual consumption of resources by each cost object.

A reasonable basis may include various allocation methods, such as labor hours, machine hours, or square footage, which are relevant and proportional to how the resources are actually used. This approach helps maintain fairness and accuracy in financial reporting, allowing management to make informed decisions based on the costs associated with producing goods or providing services.

The other options may not align with the principles of effective cost allocation. For example, percentage of sales may not accurately reflect the true consumption of resources, since some indirect costs may not be directly related to sales volume. Last year’s expenditures might not be representative of current costs, which can lead to outdated or irrelevant cost allocations. Departmental layoffs do not pertain to the method of cost allocation; rather, they relate to staffing decisions, which do not involve distributing indirect costs.