Abstract This article focuses on the principles of allocating costs. There appear to be three ways of assigning costs: first, by direct application, second, by allocation and third, by proration. The first method, direct application is used where there is a demonstrable and immediate relationship between the cost and the thing to which it is assigned. The second method, allocation applies to those cases where there is demonstrable relationship between the cost and the thing to which it is being applied but the relationship is not such that absolute accuracy or rightness is precisely determinable. The third method, proration pertains to situations in which there is a desire to assign functional costs yet no demonstrable relationship exists to rely upon for measurement of the various shares to be assigned. This is the problem one faces, for example, when he tries to assign the salary of the production manager to the various production departments, or, to make it even more difficult, the salary of the company president to the various productive and sales departments. It is natural for the cost accountant to want to prorate and allocate costs because that is one of the first things he learned when he went to school, profit measurement being emphasized at the start as a general rule. Sometimes it seems that the emphasis never should have been that way in the first place, because it has led many accountants into the error of indiscriminate allocation in their approach to different problems of costing.
John Angus Beckett (Sun,) studied this question.