The process of distributing overhead costs across an organization is called an allocation. Costs may need to be split among many departments or business divisions in a firm. A different person might desire to allocate costs to specific products or projects. Fundamentally, the best method of allocating resources involves fairly allocating expenditures to the areas that profit from them.

Organizations that allocate costs gain from more precise financial reports that provide more specific information. We can see actual profitability results by properly distributing the costs, and we may base our strategic choices on those results.

Organizations are able to respond to queries like these thanks to these comprehensive results:

Do we profit from this project?
Should we discontinue marketing this item?
What staff adjustments are necessary?