Financial Management
Cost Allocation Without the Fights: How Finance Can Make Shared Services Feel Fair
Why Overhead Feels “Unfair” to the Business
Finance, HR, IT, facilities and legal all provide services that support revenue-generating teams—but don’t directly produce revenue themselves. When these shared services costs are allocated to business units, disputes quickly arise: “Why is my allocation so high?” “Why did IT costs jump 15%?” If the allocation model is opaque or inconsistent, business leaders lose trust in the numbers.
Common Approaches to Cost Allocation
Organizations use a variety of methods, including:
- Simple percentage allocations (e.g., split IT based on headcount).
- Driver-based allocations using metrics like tickets, usage or square footage.
- Chargeback models where internal customers “buy” services from shared functions.
Each method has trade-offs between simplicity, accuracy and behavior change. The best model is one that is consistent, transparent and aligned with strategy.
Why You Need Tools (Not Just Spreadsheets) for Allocation
As companies grow, spreadsheet-based allocation models become risky:
- Complex formulas that only a few people understand.
- Manual refreshes for drivers and cost pools.
- Limited audit trails for how numbers were derived.
- Difficulty explaining allocations to non-finance stakeholders.
Cost allocation modules within ERP or FP&A software provide a governed, repeatable framework.
Building Cost Pools and Drivers in Software
A structured allocation model usually includes:
- Cost pools for each shared function (IT, HR, Finance, Facilities).
- Drivers that represent consumption (headcount, tickets, system usage, square footage, revenue).
- Allocation rules linking pools to business units, products or cost centers.
Finance can simulate the impact of different drivers before locking in a policy, using the system to test and compare allocations.
Communicating the Model to the Business
Even the most elegant allocation model will fail if stakeholders don’t understand it. Cost allocation tools support:
- Reports that show how each allocation was calculated.
- Breakdowns by driver values and rates (e.g., cost per user per month).
- Scenario comparisons (“what if we allocate IT on tickets instead of headcount?”).
Finance should treat the allocation model as part of the company’s internal “contract” and revisit it periodically with business leaders.
Using Allocations for Better Decisions, Not Just Reporting
When done well, cost allocation informs behavior:
- Business units understand the cost of their consumption and look for ways to optimize.
- Shared services teams can justify investments by showing value delivered vs. cost.
- Product and customer profitability analyses include a fair share of overhead.
Cost allocation shifts from a contentious month-end exercise to a tool for managing efficiency and demand.
Final Thoughts
Cost allocation and shared services accounting will never be completely free of debate, but with a transparent, driver-based model supported by finance systems, those debates can be productive. Finance leaders can turn overhead from a black box into a meaningful set of signals about how the organization uses—and values—shared capabilities.
- Top Expert
Nathan Rowan
Program Research, Editor, Expert in ERP, Cloud, Financial Automation
