Production Cost Allocation

Production cost allocation is the allocation of a cost or a group of costs (also known as a cost pool) with one or more cost objectives with the goal of producing one or more products. This concept is primarily used in a manufacturing setting. One example of a cost pool in the manufacturing process is labor hours. There are two types of labor hours in manufacturing: direct and indirect. Direct labor hours cost, such as the assembly line employees salaries, is the allocation of labor cost directly to the labor cost objective of manufacturing a product. Indirect labor hours cost is the allocation of labor cost that is not directly involved in the manufacturing process, such as office and sales salaries. Another example of a cost pool is materials. The cost can be traced back to the materials used to manufacture a specific product. Hence, product is the cost object, and the manufacturing of the product generates the cost and expenses that can be traced or associated with the product.