Financial Glossary
Overhead Allocation
Overhead allocation is the process of assigning indirect costs, such as rent, utilities, insurance, and administrative salaries, to specific products, jobs, departments, or locations. Because these costs cannot be traced directly to one revenue source, they are spread using an allocation base such as labor hours, machine hours, square footage, or sales. The goal is to reflect the true cost of each activity.
Problem & Application
Without allocation, indirect costs sit in a lump and hide which parts of the business actually make money. A campground with multiple revenue lines, or an operator running several properties, needs overhead spread fairly to see which sites or services are truly profitable after carrying their share of fixed costs. The allocation base you choose can change those answers, so picking a sensible one matters.
In Short
Overhead allocation reveals the full cost behind each product, job, or location, turning a vague pile of indirect expense into actionable profitability data.