Rent, insurance, the accounting software subscription and the office manager’s salary serve the whole business. Left in a central “overheads” bucket they make every department look more profitable than it is. Shared cost allocation spreads those costs across the parts of the business that use them, so a manager can see whether the workshop or the retail counter covers its share of the building.
This is an internal management exercise inside one company. Labelling transactions by department in the first place is covered in cost centres in bookkeeping. When the costs are shared between separate companies, an allocation journal is not enough: the company that pays must invoice the others, which is a different process explained in intercompany recharges and shared services.
Pick a key that follows the cost
An allocation key is the measure you use to divide a cost. The best key is the one that best explains why the cost exists.
| Shared cost | Usual key | Why it fits |
|---|---|---|
| Rent, rates, cleaning, building insurance | Floor area (m²) | Space drives the cost |
| Software licensed per user | Named users or seats | The bill itself is per seat |
| HR, payroll administration | Headcount | Effort rises with the number of people |
| Bookkeeping, reception, general management | Headcount, time estimate or revenue | No direct driver; choose and keep one |
| Utilities in a mixed workshop and office | Metered use, or floor area weighted for machinery | Usage differs sharply between areas |
| Marketing for the whole brand | Revenue | Benefit roughly follows sales |
Revenue is the easiest key to calculate and the most tempting to overuse. It moves costs onto whichever unit is growing fastest, which can make a successful product line look worse every quarter. Use it only where nothing better explains the cost.
A worked allocation
A printing business has three cost centres: Production, Design studio and Shop. Monthly shared costs sit in a fourth cost centre, Central.
Rent of £6,000 is split by floor area: Production 300 m², Design 100 m², Shop 100 m², total 500 m².
- Production: 300 ÷ 500 × £6,000 = £3,600
- Design studio: 100 ÷ 500 × £6,000 = £1,200
- Shop: 100 ÷ 500 × £6,000 = £1,200
Office administrator’s salary of £3,000 is split by headcount: Production 9, Design 4, Shop 2, total 15.
- Production: 9 ÷ 15 × £3,000 = £1,800
- Design studio: 4 ÷ 15 × £3,000 = £800
- Shop: 2 ÷ 15 × £3,000 = £400
Posting the reallocation journal
Keep the nominal code the same and move only the cost centre. That way the statutory profit and loss account, which reports by type of cost, is unchanged, and the rent still reads as rent.
| Nominal code | Cost centre | Debit | Credit |
|---|---|---|---|
| Rent | Production | £3,600 | |
| Rent | Design studio | £1,200 | |
| Rent | Shop | £1,200 | |
| Rent | Central | £6,000 | |
| Office salaries | Production | £1,800 | |
| Office salaries | Design studio | £800 | |
| Office salaries | Shop | £400 | |
| Office salaries | Central | £3,000 |
The journal nets to zero by nominal code and in total. There is no VAT on an allocation inside one company, because nothing has been supplied to anyone. After posting, Central should show nil for every allocated cost; anything left there was either missed or deliberately kept central.
Some businesses prefer separate Allocated overheads in and Allocated overheads out codes so the movement is visible on the face of the departmental reports. That works too, provided the two codes always net to nil across the company.
Write the basis down
An allocation nobody can explain becomes an argument at every management meeting. Keep a one-page allocation basis with the close file:
- each shared cost and the key used for it;
- the source of the key data (floor plan, payroll headcount on the last day of the month, user list from the software admin page);
- how often the key is refreshed, for example floor area yearly and headcount monthly;
- who approved it and from which month it applies.
When you change a key, change it from a stated month and re-run the comparative months if managers compare year on year; otherwise a department’s results jump for reasons that have nothing to do with its performance.
Allocations and the statutory accounts
Cost centre allocations do not change the company’s total profit or its corporation tax. The one area where an allocation does reach the balance sheet is stock: under FRS 102 the cost of manufactured goods includes a systematic share of production overheads based on normal capacity, while general administration is excluded. If you manufacture, the overheads you allocate to Production are the starting point for that calculation, so keep production and non-production overheads clearly separated in your keys.
Use the allocated departmental reports in your month-end variance analysis and in the management accounts, but show direct profit before allocations alongside, because that is the figure a department head can actually influence.
Keep the monthly allocation journal in the same format each time so the split stays comparable; in a Nexbal free trial you can tag the costs to departments or projects and check the split in the reports.