arbitrary allocation

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A cost allocation in which the allocation base used is not likely to give accurate costs. For example, the cost of a lecture is not significantly dependent on the number of students: a class of 10 students requires one lecturer for (say) one hour as does a class of 200 students. Therefore using the number of students as an allocation base would result in an arbitrary allocation. The system of activity-based costing is based on the idea that arbitrary allocations should be avoided and replaced with cause-and-effect allocations.

Subjects: Accounting.

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