Cost allocation is the process of assigning indirect costs to specific cost objects in a way that reflects resource consumption. This is crucial for making informed decisions, setting prices, and measuring profitability.
In a system of activity-based costing, any factor such as the number of units, number of transactions, or duration of transactions that drives the costs arising from a particular activity. When such factors can be clearly identified and measured, they serve as the basis for allocating costs to cost objects.
