Cost allocation is the process of assigning indirect costs to a cost object. the indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. the base that is employed to allocate a homogeneous cost pool should
have a cause-and-effect relationship with the cost items in the cost pool.
assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way.
be a nonfinancial measure (e. g., number of setups) because a nonfinancial measure is more objective.
have a high correlation with the cost items in the cost pool as the sole criterion for selection.