Forums Accounting What is Cost Allocation?

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    Ayush Nair

    What is Cost Allocation?

    Ayush Nair

    Cost Allocation: Allocating cost of service Departments

    There are two methods of allocating the cost of service departments. One is, Direct Method and the other one is, Step method.

    Direct method– In this method, service department cost is directly transferred to a productive department and these productive departments are those departments which rely on the service department. Allocation is based on the logical benchmark. For example- Cafeteria cost may be allocated on the basis of a number of employees.

    Step Method– Many times a service department provide services to another service department. A service department’s cost is first allocated to other units, including other service departments. Then the cost is finally added to the production department.

    Cost Allocation: By Product Costing and Joint Product Costing

    A joint cost is a cost that benefits more than one product, while a by-product is a product that is a minor result of a production process and which has minor sales. It is used when the final products are split off during the last stage of production.


    a) Meaning- When the production of two or more products are made with the same input and process, it is known as Joint Product. Whereas, by product is accidentally produced product during the operation of other product.

    b) Economic Value- Economic value of the joint product is the same whereas the economic value of by-product is lower than the main product.

    c) Input- Input in case of Joint Product is Raw material and in case of by-product, it is waste or scrap of the main product.

    d) Further processing- It is not required in the case of by-product whereas required to turn the joint products into the finished product.

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