An allocation model is a method used to distribute shared costs, like shipping or overhead, among various items, departments, or projects. It helps ensure that each product or service reflects its true cost of production based on specific criteria.
Freight shipments can be allocated to a PO either by the number of items or by the value of those items.
For example, let’s consider PO #1234 with the following line items:
100 units of SKU 123 at $10 each
50 units of SKU 456 at $20 each
If you allocate the $1000 shipping cost by the number of items:
SKU | Quantity | Price per Unit | Shipping per Unit | Landed Costs |
SKU 123 | 100 | $10 | $6.66 | $16.66 |
SKU 456 | 50 | $20 | $6.66 | $26.66 |
If you allocate the $1000 shipping cost by the value of items:
SKU | Quantity | Price per Unit | Shipping per Unit | Landed Costs |
SKU 123 | 100 | $10 | $5 | $15 |
SKU 456 | 50 | $20 | $10 | $30 |
Neither allocation model is inherently superior to the other. The best allocation method for your business depends on your specific needs and considerations.