Cost Allocation
What is cost allocation?
Cost allocation is the process of assigning shared or indirect costs to the projects, clients, or service lines that benefit from them. It lets a firm see the full cost of each part of the business, not only the direct costs.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that tags costs consistently and applies the allocation method each month, so project and client margins are comparable.
How to allocate costs
- Identify shared costs such as rent, software, and administrative salaries
- Choose a driver, such as labor hours or revenue, that reflects how each cost is used
- Apply the same method every period and document it
The figures below are illustrative. A firm allocates $20,000 of monthly shared costs across two service lines by labor hours. A line that uses 60 percent of the hours carries $12,000.
Why it matters for service firms
Without allocation, a project can look profitable while quietly relying on shared costs it does not cover. Allocation gives owners a fuller picture for pricing, staffing, and deciding which services to grow or drop.
Frequently asked questions
Which allocation base is best?
Choose the driver that best reflects how the cost is used, such as labor hours for people costs or revenue for general overhead. A simple base applied consistently is better than a complex one used inconsistently.
Should every cost be allocated?
Not necessarily. Many firms review results both before and after overhead. Allocating every cost can hide whether a line covers its direct costs on its own, so show both views and explain which one drives each decision.
Related terms and guides: indirect costs, overhead allocation, overhead rate, direct costs, and project profitability.