It’s (past) Time to KILL a Word – “Allocation”

The essence of internal decision support information is CAUSALITY, the reflection of causal relationships; the ability to go from cause to effect or effect to cause.

I reviewed the definitions of “Allocation” (or allocate) in conventional dictionaries and various accounting definitions and never found the word “causal” mentioned; the closest I got in an accounting definition was “rational basis” – which is a long way from causality.

My conclusion is that when internal decision support is the objective of a cost or operational model, “allocation” should never be used.  The term “allocation” does not mean or imply a reflection of causality at a strength level that any knowledgeable, responsible person would accept for their decision making.  When I first became familiar with costing methodologies, I used to say:  “I’ll make it cost whatever you want, just give me choice of adjective.” (in front of the word “cost”).   I thought I was ever so smart and clever, now I consider that comment borderline unethical.

Sadly, many accountants and financial professionals still do this, perhaps less boastfully, because they view themselves as professional and ethical as long as they operate within generally accepted accounting and external financial reporting rules and principles.   They operate within the “one version of the truth” (meaning audited financial accounting data) myth.  To comply with these rules and principles, a “rational basis” is fine, and that allows the flexibility manipulate allocations.  However, for financial internal decision support, only a causal or cause and effect basis is acceptable (and ethical) – whether or not “legal” under financial accounting/reporting rules and principles.

That’s the difference between cost accounting, which should be defined as the costing done to comply with regulatory or financial reporting, and managerial costing, defined as the costing done purely for internal decision support…where causality rules.

My suggestion for terminology is "causal assignments" of costs. In some cases, there may be weak causal assignments or noncausal assignments, but these should be clearly identified.

So for financial internal decision support models and information, DEATH TO (ever saying or using) ALLOCATION!!!   Let causality rule!