How is cost allocation defined?

Cost allocation refers to the process of distributing indirect costs to various departments or cost centers within an organization. This process is essential for accurately reflecting the expenses incurred by different divisions and for ensuring that each department is charged appropriately based on its usage of resources.

Indirect costs, which can include items such as utilities, rent, and administrative salaries, are not directly tied to a specific product or service but are necessary for overall operations. By allocating these costs, organizations can establish a clearer picture of profitability and operational efficiency for individual departments. This allocation allows management to better assess performance, set budgets, and make informed business decisions.

In contrast to the other options, which either pertain to fixed costs only or focus specifically on direct costs, the correct answer captures the broader scope of cost allocation as it applies to indirect costs across an organization. This distinction is crucial for understanding how costs impact financial reporting and departmental accountability.