Accounting - Arbitrary allocation of expenses

Arbitrary allocation of expenses

Allocation of expenses between departments is intended to assist in
providing information about the contribution of each department to the
earning of profits but this objective will not be achieved unless the
allocation provides a good approximation of the true cost involved.

Sales may be the basis for the allocation of expenses, however, the
expense has to be directly linked to sales.

Floor space is another way of allocating expense. However, the following
example indicates the problem in using that as a basis for expense
allocation. Two departments may have equal floor space yet one department
is on the top floor and the other is at ground level. The ground level
location has more chance of gaining from passing traffic, people browsing
and so on, and so would be a more valuable location.

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