Below, we outline a real world example of Cost Allocation in order to explain the concept. Understanding allocation of expenses for enterprise is made easier with practical examples of Cost Allocation. In our previous blog on this topic, we outlined the fundamentals of Cost Allocation in accounting. Here we outline four practical Examples of Cost Allocation, the lemonade stand Cost Allocation example, the example of Cost Allocation in pro sports, and two real world business example of Cost Allocation, wholesale retail Cost Allocation with Costco, and manufacturing Cost Allocation with Coca-Cola.
Lemonade Stand Example of Cost Allocation
If you run a lemonade stand, you have basic costs: sugar, lemons, cups, perhaps a nominal rent for the space you’re using. Some costs, like the lemons, are easy to model and understand. They directly go into making the lemonade you sell. But what about the rent? Or the water bill? Those expenses benefit the entire operation, not just one glass of lemonade.
Now, imagine you expand the business by creating new branches. If you have three lemonade stands, your costs get more complicated. Some are still specific, like the lemons for the original stand. But others, say for instance you start a social media advertising campaign, must be shared across all three of your stands.
Cost allocation is the process of understanding and dividing shared and total costs in a fair and logical way. You might find a basis, like the sales each stand generates or the number of cups they serve, and use that to split the costs. If Stand A serves 50% of the lemonade, it gets assigned 50% of the marketing costs.
Why approach it this way? Because to make good decisions, you need to know the true cost of each stand. You may see that one is profitable, while another needs improvement, and you can weigh whether it’s worth expanding further. It might lead to a concretely different course of action. In this instance, you use Cost Allocation to your advantage, to understand your business and invest in an under-performing stand.
At its heart, Cost Allocation is about assigning shared costs to the people, products, or services that actually benefit from them. It’s not just a financial accounting exercise, but a management accounting tool to see where your resources are allocated, and to make smarter choices.
Pro Sports Example of Cost Allocation
Imagine you own a football team. Your expenses range from player salaries to maintaining the stadium, buying equipment, and paying for coaching and support staff expenses. Some costs, like a quarterback’s salary, are easy to understand and assign, they directly relate to that player. But what about something indirect like the stadium lighting? Administrative staff costs? Or the cost of maintaining the team bus? These are shared expenses that benefit the whole team.
Or, let’s say you also share a stadium with another team. In Pittsburgh, the pro Steelers share with the college football team Pitt. How do you divide the costs? 50/50? By games hosted? By attendance? What about the extra cost of lights during a night game? Overhead Cost Allocation is the process at the root of assigning each team a bill, from the perspective of the stadium ownership.
Beyond stadium costs, the principle of Cost Allocation is also one of the principles at the heart of the growing field of sports science. Take the example seen in Moneyball. The Oakland A’s general manager, Billy Beane believed that costs were not accurately allocated to the right attributes in players by the league as a whole, he believed the market undervalued certain data-points like on-base percentage. Beane pushed against old-school beliefs of a “feel” for a player, by implementing a cold, data-driven approach to recruitment.
The A’s began to sign players based on identifiably undervalued data points, and eventually turned it to a strategic advantage. They built a team head and shoulders above others with a similar salary budget, all through a focused strategy of better allocating expenses, which is a relevant example whether you’re managing strategy for a sports team or a Fortune 500 company.
Real World Manufacturing Example of Cost Allocation: Coca-Cola
Coca-Cola is a global business empire. Factories produce syrup, marketing campaigns run worldwide, distribution networks deliver to every corner of the globe, and local partners finish the bottling process in thousands of locations in 150+ countries. Some costs, like the ingredients for their famous formula, might be straightforward, they directly tie to every bottle of Coke sold, and can be understood with Direct Cost Allocation. The supply, bottling, and distribution costs can be tied directly to a per-unit cost.
But here’s where it gets tricky. What about the cost of running a 30-second Super Bowl ad (In 2025, approximately $7M)? Or the expense of running an innovation lab to create new products like Coke Zero, or energy drinks? These are shared costs, expenses that benefit multiple parts of the business, but don’t have a clear owner.
Cost Allocation is how Coca-Cola understands and divides these shared costs among its regions, products, or operations to drive better organizational decisions. For instance, that brief Super Bowl spot might be allocated as a marketing expense based on sales volume in each region. But a Super Bowl ad might have 80% of its direct impact within the borders of the US. How can management accurately incorporate this one-off expense into their global marketing expense? With such a high level of complexity and variable global impact, using an enterprise Cost Allocation Model, and agreeing on a basis of whom these costs benefit, is the chosen strategy for an organization like Coke.
Why does Coca-Cola invest time and resources into setting up their Cost Allocation system? It helps them know the true costs and benefits of every product and every market. Maybe Coke Zero sells well in Europe but struggles in the US, and its development costs should reflect that. Or perhaps certain markets are thriving while others are experiencing rapidly increasing logistical costs. Ultimately, this insight lets the global decision makers refine pricing, allocate resources, and decide where to focus next. It’s about making decisions that help a company remain one of the world’s largest and most profitable brands.
Cost Allocation Example in Wholesale retail: Costco
Costco’s business model is focused on efficiency and expert supply chains. They have massive warehouses, limited brand selection, and sell everything from groceries to electronics to vacation packages. Some costs are straightforward, such as the import price of coffee beans or an electricity bill for the freezer section. Those directly tie to specific products or departments.
But what about shared overhead costs? For example, the cost of running a regional distribution warehouse further back in the supply chain. Lighting, heating, security staff and transport must incur costs. These costs benefit all products and departments in many stores but don’t belong to one category. They are an example of a more complex indirect cost for Costco’s decision makers to understand.
Costco offers fast food at many of its locations. This includes a $1.50 “hot dog combo” which has famously not increased in price since 1984, weathering over 200% total inflation. Retail strategists will point out that the combo can be seen a loss-leader. But how can the company management determine the true cost and benefit of this initiative?
Another idiosyncrasy about Costco’s business model is its member’s only policy. Costco stores in the US and abroad are not publicly accessible without paying a membership fee (of approximately $65 per household per year). This generates a revenue stream of $4.6B per year. So a picture could be formed about how the revenue from these memberships can be allocated to the food court providing the loss-leader hot dog combo. This would be an example of an indirect costing method. While this may be commercially savvy, it raises vast numbers of financial data points to record, understand and allocate, in order to keep the $1.50 hot dog combo as a strongly effective loss-leading strategy.
A business like Costco benefits enormously from deploying a detailed direct and indirect cost modeling solution. It has allowed the company to hot-wire consumer psychology and provide loss leading products, smartly funded offerings, subsidized through other revenue streams of its business. Without employing a detailed Cost Allocation strategy, and allocating indirect costs accurately and logically, Costco’s management would not be able to accurately price and understand these offerings to the market. As such, this financial ingenuity and effective Cost Allocation is one of its unique strategic differentiators within the US grocery and retail sector.
Example of Cost Allocation Reviewed
Through examples of sports analogies, famous business examples and simple lemonade stands, we begin to understand how Cost Allocation impacts business. Cost Allocation helps to manage complex costs, map indirect inputs to indirect outputs, help set prices, and make decisions. For global companies with revenue in the millions or billions, Cost Allocation is a solution, usually taken through a software purchase, that gets businesses thinking through a lens that will increase profitability and serve underlying operational efficiency.
Links & Further Reading
Read our blog to understand several market leading Cost Allocation tools compared: https://www.costperform.com/apptio-vs-costperform-vs-oracle-hpcm-how-cost-allocation-tools-compare/
Reach out to CostPerform to gain understanding of its enterprise solution in a free introductory call: https://www.costperform.com/demo-request/
Download the corporate allocations white paper: https://www.costperform.com/downloads/corporate-allocations-whitepaper/
