In inventory management, what does "cost allocation" refer to?

Cost allocation in inventory management specifically refers to the process of assigning costs associated with inventory to various business units or areas within an organization. This is a critical function because it allows businesses to accurately reflect the true cost of goods sold and to manage their pricing strategies effectively.

By doing so, organizations can assess the profitability of different products, departments, or operations, which aids in decision-making and resource allocation. This process ensures that every unit of product sold is matched with its related costs, leading to better financial reporting and operational efficiency.

In contrast, determining selling prices focuses on how to set prices based on various factors such as market conditions or competition, which does not directly relate to the allocation of costs. Calculating total inventory value is about tallying the overall worth of all inventory on hand, while determining the depreciation of inventory relates to accounting for the reduction in value over time, not the allocation of costs to different business units.