Cost Allocation is a process when an accountant identifies, summarizes, and assigns costs to cost centers instead of spreading them around. Cost centers are the items that you want to track the costs of individually.
A cost center can be defined as a smaller level than a department. It could involve a particular type of products, machine, or assembly line. However, more detailed view of cost centers requires more detailed information tracking, and so is not commonly used.
One of the main purposes of allocating costs is to provide information for decision making. Knowing what department or product is taking a greater proportion of funds is important for weighing alternatives in both the short and long run. Cost allocation is an important planning tool for reducing costs and increasing profits. It can also be a cost motivator, giving managers incentives for making sure that costs are accumulated carefully. Managers will be more likely to operate their departments with greater efficiency.
Using Cost centers in Precoro one can complete following tasks:
- need to control company costs according to customer classification;
- have a general cost control of the company;
- analyze the most costly items of expenditure of the company and monitor their dynamics;
- analyze financial results of the company, based on statistical data of cost centers.
In Precoro costs are allocated in two ways - by products and by documents.
Cost allocation by-products mean that each product applies to appropriate cost. It's commonly used by an accountant as a chart of accounts. To configure Precoro this way use cost centers.
Cost allocation by documents means that each request, the order applies to the appropriate department, business unit, eg. Commonly used by finance or administrative departments. To configure Precoro this way apply user cost centers.