Which statement about cost allocation is most accurate?

• A. It distributes indirect costs randomly to departments.
• B. It eliminates indirect costs from budgeting.
• C. It assigns indirect costs to programs using a rational basis; ensures fair funding of programs and proper reimbursement.
• D. It inflates indirect costs to inflate budgets.

Answer: (C)

Cost allocation is about assigning indirect costs (overhead) to programs in a systematic, rational way so the true use of resources is reflected in each program’s cost. The best choice describes this process: indirect costs are allocated to programs based on a rational basis, which helps ensure fair funding of programs and proper reimbursement. This means costs are shared according to factors that drive them—like square footage used, direct staff hours, or number of participants—so each program bears its fair share and funders can reimburse accurately.

Think of it as moving from a vague, pooled pool of overhead to a principled split where the method you use ties overhead to actual activity. That approach supports transparency and compliance in budgeting and reporting. It’s not about random distribution, eliminating indirect costs, or inflating budgets.