What Is a Cost Allocation Base?

Cost allocation (referred to as CA) refers to the allocation of costs among users and various types of users, or the allocation of costs according to the cost items identified as incurred expenses.

Cost sharing allows you to accurately measure true costs, and in turn invest in each resource group, project, and plan; whether it's paid or not. Without cost sharing, companies would view the costs associated with all plans and business units as "daily and administrative" expenses, leaving management unable to determine what investments and resource groups can make money.

There are several general principles or guidelines for cost allocation, which are the theoretical basis of the "dividable cost-residual benefit" method.

(1) Generally speaking, the cost allocated to any one target should not be greater than its benefit value, and should not be offset by the benefits of other targets. Therefore, the water fee for irrigation water should not be greater than its contribution to project benefits. Similarly, we believe that no target should normally be subsidized by other targets. In most cases, in order to provide farmers with low-cost irrigation water, high fees should not be levied on power users.

(2) All costs incurred by a target shall be fully allocated to this target: the cost of the channel shall be fully allocated to the irrigation target, and the cost of the transmission line shall be fully allocated to the power target. Each dividable cost is the minimum amount of levy that can be collected for the corresponding target. If the cost of the channel itself exceeds the benefits of irrigation water, it is clear that the irrigation component should not be included in the project.

(3) If the role played by a goal can be replaced by an alternative, more economical single goal project, then the cost allocated to this goal should never be greater than the actual cost of the latter. The alternative single target project specifies the maximum amount that can be levied for any target. If the cost allocated to the power part of a multi-target water development project is greater than the cost of an alternative thermal power plant that can provide the same power, it is unfair; if the cost charged to the irrigation part is greater than the alternative single-target pumping plan The cost is also unfair. ^[2]

The common cost generally refers to the cost provided by the management department or auxiliary service department to other departments and related to two or more cost objects, such as the costs of personnel education, general affairs, computers, accounting, cashier and other departments. The common cost allocation basis is divided into the following four types.

(1) Common costs related to labor: apportion the number of commonly used employees and the amount of wages.

(2) Common costs related to equipment: common operating time, number of units, value, etc. of the allocation base.

(3) Common cost related to area: area, quantity or other similar area-related standards commonly used for apportionment.

(4) Common costs related to services: The allocation basis is based on quantity, value, and other service-related standards. ^[3]