Final answer:
Allocation is the process of charging costs from service cost centres to production cost centres, ensuring accurate production cost reporting by distributing service department expenses based on an appropriate allocation base.
Step-by-step explanation:
Allocation is used to charge costs from service cost centres to production cost centres in order to accurately reflect the consumption of services by the production process. In a manufacturing setting, service departments provide support to the production departments. These services can include maintenance, quality control, and administrative services. To ensure that the cost of production is accurately reported, the expenses of the service departments are allocated to the production cost centres based on an appropriate basis, such as machine hours or labor hours utilized by each production cost centre.
To do this, companies often use various allocation bases, such as direct labor hours, square footage, or power consumed, to distribute service department costs fairly among the production cost centres. This process is essential for creating an accurate cost of goods sold (COGS) and for internal decision-making processes, such as pricing and profitability analysis.