Definition

• Allocated construction costs are any costs that a company wants to categorize into separate, cost center line items. Many companies use a single cost structure that lumps costs into a single expense account on the income statement. Companies that use allocated costs attribute these to cost centers that they list individually, clearly showing cost distribution among specific expense sources. For example, a company might allocate the costs for different types of labor. It may allocate architect and designer salaries to a "Pre-construction" cost center, and allocate drywall and roofer salaries to a "Construction" cost center.
  
  

Function

• Companies allocate any cost that they must monitor closely for strategic and managerial reasons. For example, labor is a significant cost for many companies, affecting the profit margin for jobs and projects. If the cost for labor allocated to the "Construction" department rises substantially during the fiscal period, managers know that they need to investigate the rise. Labor costs arising from construction overtime pay might tell managers that the company needs to accomplish more work per employee shift.
  
  

Expensing

• The company calculates individually all of the allocated costs in a cost center, and then adds them together to determine the total cost for that center during the fiscal period. For instance, labor hours allocated to the "Construction" cost center might equal $100,000 for the fiscal year, and transportation might equal $5,000. The total for costs allocated to the "Construction" cost center would then equal $105,000.
  
  

Considerations

• To allocate construction costs, accountants must create a detailed system that specifies the type of allocated costs that belong to each cost center. Without such a detailed system for allocating costs, managers and accountants could attribute costs to the wrong cost center, or assign one cost to multiple cost centers. In addition, some allocated costs may not fit into just one cost center. For example, if a company buys tools to build houses and fix company vehicles, the expense might fit a "Construction" cost center and a "Transportation" cost center.