Allocation base (Absorption rate)

Allocation base (or absorption rate) is a monetary or non-monetary parameter, according to which is allocated something that cannot be attributed directly.  It is often used to allocate indirect costs (overheads) to the cost object which is typically a specific product or service.

Allocation base can be:

• monetary- e.g. the value of tangible assets or sales
• natural – e.g. floor area, kWh or m3, the number of employees, hours worked in a particular production center

Chosen is usually a base/rate that does not change often and that is strongly associated with the allocated object (usually costs). The basic condition is therefore a meaningful selection.

More allocation bases/rates are often used when allocating indirect costs (overheads), each for a different kind / type of cost. This is because different costs may depend on different factors. For example, the convenient base for repair and maintenance costs, insurance, machine depreciation can be the value of the property. For rent or depreciation of factory buildings floor area, for canteen operation number of employees, for energy kilowatt hours and so on.

Allocation rate (absorption base) is used, for example, in the following costing methods:

• absorption costing
• costing by division using relative numbers