Cost allocation

Cost allocation is the assignment of costs to the project, client or cost center that caused them. In project business it decides whether profitability can be read per project at all, because a cost that is never allocated disappears into overhead and distorts every figure built on top of it.

What has to be allocated in a project business?

The cost of recorded hours, external invoices such as freelancers, licences and subcontractors, travel, and anything bought for a specific project. The harder cases are shared costs: tools used by several projects, or management time. Each cost belongs to the project, client or cost center that caused it.

When should a cost be allocated?

At the moment it arises. A receipt assigned three weeks later is assigned by somebody reconstructing it, and a freelance invoice arriving after the project closed usually lands in overhead because the project is already settled. A cost that is never allocated disappears into overhead and distorts every figure built on top of it.

What happens when allocation is incomplete?

Projects look more profitable than they are and overhead looks larger than it is. Both errors point the same way, so pricing built on those figures is too low, and the mistake repeats on the next project. Profitability can only be read per project when every cost that project caused is assigned to it.

Should shared costs be allocated too?

Only where the basis is defensible. An arbitrary split invites arguments about the method and hides the figures that matter. The usual compromise is to allocate direct costs precisely and carry shared costs through an overhead rate. Shared costs include tools used by several projects and management time.

troi assigns a cost to its project the day it arrives. See digital receipt capture.