Plain definition
Cost allocation assigns a shared indirect cost to products, jobs, customers, or other cost objects using a selected basis such as labour hours, machine hours, or deliveries. It improves visibility but does not turn a shared cost into a directly observed cost.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A support team costs and handles 600 service tickets. Finance allocates per ticket to customer groups. A customer with 100 tickets receives , prompting the account manager to examine why demand is high rather than claiming the allocation proves the customer caused every salary cost.
Why it matters
A poor basis can reward heavy users and penalise light users, producing wrong pricing or product decisions.
Practical consequence
Select drivers with a plausible link to resource consumption, disclose the basis, and revise it when operations change. Use sensitivity checks before acting on a close profitability result.