Allocation Definition, Example and Importance
Allocation Definition – The process of dividing costs in a certain category among several cost centers, typically on the basis of usage.
In simple words, allocation refers to the dividing various types of resources among various projects or departments. These resources could be funds, capital, land, labor, etc. Well in an entity various process goes on simultaneously. Hence, it becomes important that every process should be smoothly carried out. In order to do so, there must be proper distribution of business resources.
Moreover, the resources are allocated on the basis of need of the project or resources. Therefore the size of resources allocated to one department may vary with another department. And if the resource is scarce, company has to decide which of the activity is most important in which that scarce resource will be used. It is also a true fact that resources are limited, then it becomes more important to correctly distribute the resources. Therefore, firms always try to make use of minimum resources and try to produce maximum from it.
Example of Allocation
In order to understand the allocation definition more clearly, we have come up with few examples. Corporate overhead such as rent and utilities may be allocated to departments according to the number of square feet they occupy.
Related Financial Terms of Allocation
Importance of Allocation
Right allocation of resources is very important as excessive utilization of resources may results in depleting the resources very early. If we talk about allocation in terms of organization, then organization allocate various resources among various activities. In this case, it becomes very important for the firm to choose which is the most important activity for them so that maximum resources could be used to carry out that activity.
Firms also should keep in mind that there are limited resources available. So they try to come up with maximum output by utilizing the minimum amount of resources. Also, any wastage should be avoided.