What is Assigned Cost?
Assigned cost is the accounting practice of linking particular expenses directly to the specific products, services, or departments that incurred those costs. It’s how businesses gain a clear picture of the actual economic outlay involved in what they sell or how they operate.
These costs can be:
- Direct: Easily traced to a specific item (e.g., materials for a product)
- Indirect: Shared across multiple items or areas (e.g., warehouse rent, software fees)
Cost assignment is a fundamental part of accurate accounting, realistic budgeting, and smart financial planning. It’s crucial for retailers to understand which aspects of their business are truly profitable and which might be draining resources.
How It Works in Practice
Retailers and manufacturers use two main methods:
This method applies when costs clearly belong to a specific cost object (the item, service, or department receiving the cost). For example, the labor hours a specific employee spends assembling a single product are directly traced to that product. Similarly, the cost of special packaging for one type of item is traced to that item.
Allocation: This method is used for distributing indirect costs, as they don’t have a direct link to a single item. Allocation uses a logical basis to spread these shared costs. For instance, electricity costs might be allocated to different departments based on the square footage each department occupies. Or, for a multi-store retail chain, corporate marketing expenses or logistics costs might be allocated to individual stores based on metrics like store size, sales volume, or the number of orders each store handles. Direct costs, like ingredients for a specific food item or components for an electronic device, are simply traced to the individual Stock Keeping Units (SKUs) they become part of.
Where Assigned Cost is Used in Store Operations
Cost assignment shows up in:
- Inventory systems – These systems rely on assigned costs to track the cost per unit of each item. This provides the foundation for accurate inventory valuation and impacts the cost of goods sold.
- POS and ERP platforms – These vital systems use assigned costs to calculate gross margins in real time. This immediate insight helps managers understand profitability on every sale.
- Financial reporting – Assigned costs are essential for building accurate financial statements, particularly Profit & Loss (P&L) statements broken down by product line, service offering, or department. This level of detail shows true performance.
- Pricing decisions – Businesses can adjust their selling prices based on the actual, calculated cost of products or services, rather than relying on estimates or assumptions. This prevents underpricing that erodes margins or overpricing that hurts sales.
Why Accurate Cost Assignment Matters
Without knowing the true cost of something, making sound business decisions becomes a guessing game. Accurate assigned cost impacts several key areas:
- Profitability analysis – It reveals which products, services, or departments are genuinely contributing to the bottom line and are worth promoting or expanding. It also highlights those that might be underperforming.
- Pricing strategy – A clear understanding of costs prevents setting prices too low (losing money) or too high (losing customers). It allows for competitive and profitable pricing.
- Inventory management – By knowing the assigned cost, retailers can identify high-cost, slow-moving items that tie up capital and might need special promotions or discontinuation.
- Resource allocation – Businesses can intelligently invest their resources, directing funds and effort towards departments or channels that show better financial returns, maximizing overall business efficiency.
Assigned cost goes beyond just bookkeeping; it’s about running a business with the clarity and confidence needed to thrive in a competitive market.
