Accounting Best Practices, Fifth Edition

12–25. Complete Allocation Bases in Advance

A number of expenses must be allocated among departments. These can include occupancy, telephone, insurance, and other costs. There is an allocation base for each allocation. For example, occupancy may be based on the square footage occupied by each department, while telephone costs are allocated based on the number of employees in a department. For each allocation base, someone in the accounting department must update all of the information based on the latest financial results, prior to creating a journal entry to allocate the costs to various departments. Because an allocation base usually includes the latest financial information before a final cost allocation is made, it tends to be one of the last action items the accounting department completes before it issues the financial statements. Because it falls so late in the process, it can have a direct impact on the total time required to issue financial statements.

The solution is a straightforward one—use information from the previous month as an allocation base. By doing so, there is no allocation base to update in the midst of the frantic release of financial statements. Instead, the update can be completed at everyone’s leisure, since it does not have to be ready until the next month’s financial statements are put together. In case there are any concerns regarding the relationship between the previous month’s allocation base and the current month’s expenses to be distributed, one ...