Allocation

This chapter discusses why allocations in accounting are unavoidable and how they render the numbers on accounting statements somewhat arbitrary. After studying this chapter you will:

Understand the arbitrary nature of all allocation schemes and the impact allocation has on accounting numbers;

Know why accounting allocations are both necessary and inescapable;

Know the different approaches to allocation;

Understand that different allocation methods result in different costs charged to various products;

Realize that broad-based allocation methods hide the cause of product and service costs;

Understand the basic differences between traditional and activity-based cost accounting systems.

Allocations are, by their very nature, arbitrary, which means that whatever is being allocated could be allocated differently. That is to say, allocations and their resulting numbers are contingent solely upon one’s discretion. Different persons might make equally valid allocations in an entirely different manner.