What does "cost allocation" involve?

Cost allocation involves the process of distributing indirect costs—expenses that are not directly tied to a specific product or department—among various cost objects, such as products, departments, or projects. This is crucial for accurately determining the true cost of production and performance evaluation. By allocating costs appropriately, businesses can better understand which products or departments are profitable and which are not, enabling informed decision-making based on the calculated costs.

In contrast, identifying fixed and variable costs is part of cost behavior analysis, which helps in understanding how costs change with production levels but does not specifically address the allocation of those costs. Calculating total costs for a specific project is focused on summing up all expenses associated with that project rather than distributing costs among various entities. Recording expenses in a detailed ledger is part of the bookkeeping process, ensuring all financial transactions are documented but does not pertain to the distribution of indirect costs.