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Cost allocation is a process that identifies,aggregates,and assigns the costs to cost objects.A cost object is any activity or thing for that you separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.It is used for financial reporting purposes.Cost allocation can also be used to spread costs among departments or inventory items.Cost allocation also comes handy in the calculation of profitability at the department or subsidiary level,which in turn may be used as the base for bonuses or the funding of additional activities. Business organizations also use cost allocation in the derivation of transfer prices between subsidiaries.
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