Expense allocation is a process of assigning indirect costs to the cost objects within the business. A cost object is an entity or any other thing with the help of which the cost is complied. There are a number of examples of cost objects including products, product line, customers, subsidiaries and the regions where a business conduct its sales. There are two types of costs direct costs and indirect costs. Indirect costs are the costs that are not associated directly with the single activity within the business. The examples may be the rent, utilities expense and office supplies.
There are a number of expense allocation methods that can be explained as under:-
Direct Labor Hour Method
In this method the overhead costs are allocated to the products that are manufactured in the factory on the biases of the number of direct labor hours used to manufacture the products. This method may not produce 100 percent accurate results but it is easy to drive
In this method the cost of corporate headquarters is allocated to the corresponding subsidiaries on the biases of their revenue. This means that the subsidiary with high level of revenue can bear the cost of corporate overhead.
In this method the cost is allocated to the cost object on the biases of the square feet utilized by the cost object.
If large numbers of costs of the company are related to the personnel costs then the indirect costs are allocated to the number of employees of the business or the number of direct labor hours counted.