Financial modelling terms explained

# Allocated Costs

Allocated costs are expenses that are paid out by a company but are not directly connected to manufacturing or selling goods or services. Allocated costs are sometimes also referred to as indirect costs

## What Are Allocated Costs?

Allocated costs are those costs which have been specifically identified and allocated to a particular cost centre or project. They may be direct costs, such as labour or materials, or indirect costs, such as overheads. Allocated costs may be fixed or variable, depending on the nature of the cost. They are used to track and monitor the performance of a particular cost centre or project.

## How Do You Calculate Allocated Costs?

In order to calculate allocated costs, one must first understand the concept of allocation. Allocation is the process of dividing total costs among different cost objects. There are a few different methods that can be used to allocate costs, but the most common is the direct method. Under the direct method, costs are allocated based on the amount of resources used by each cost object. For example, if a company has two divisions, A and B, and division A uses twice as many resources as division B, then division A would be allocated twice as many costs as division B.

Once the costs have been allocated, the next step is to calculate the allocated costs. This can be done by multiplying the allocated amount by the cost object's usage rate. For example, if division A was allocated \$10,000 based on its usage rate of 2, then the allocated cost for division A would be \$20,000.

## What Is the Difference Between an Allocated Cost and a Variable Cost?

There is a big difference between an allocated cost and a variable cost. An allocated cost is a fixed cost that is assigned to a certain area or product. A variable cost, on the other hand, changes depending on how much product or service is produced. For example, the cost of materials used in producing a product is a variable cost, while the rent for a factory is an allocated cost.

## What Is the Difference Between an Allocated Cost and a Fixed Cost?

Fixed costs are those costs that remain unchanged in the short-term, regardless of the level of business activity. For example, rent or mortgage payments, insurance premiums, and debt service costs are all fixed costs. Conversely, allocated costs are incurred only when a specific activity occurs. For example, the cost of materials used in the production of a good would be an allocated cost.

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