A simple definition
In accounting, expense allocations are how you assign shared costs across an organization. These shared costs might be allocated to customers, departments, individual products, or teams. The goal is to have a map, or model, of who actually consumes what within a business, non-profit, or governmental organization.
Why organizations allocate expenses
As organizations grow in size and complexity, it becomes harder for one person, or for a finance department, to accurately understand which area of the business is responsible for which cost. Overheads, like running the HR department, legal retainers, office rental, or AWS computational costs, are often left in one big bucket, and each department or product must shoulder some of the burden for its financial accounts.
Where the skill lies
If it’s determined that total operational spend on AWS compute at a big bank is $10M a year, the organization must understand, which wing of its business actually benefits from this $10M spend. It’s then crucial, if the business wishes to make accurate predictions on where it can make the most profits, to allocate these costs according to the right methodology.
Common methods of allocation
Allocations can then be made according to various methodologies. CostPerform discusses common methods of cost allocation in further detail in another piece. Activity-Based Costing (ABC) is the standard practice accounting method for allocating costs based on the activities that drive them.
Good to note: allocations are not to be confused with cost apportionment, which spreads costs using broad percentages or averages, rather than allocating them based on actual or causally driven consumption.
Two types of ABC:
- Time-Driven Activity-Based Costing (TDABC) uses time or hours as the main driver of the allocations. For example, how many hours of AWS compute are used exactly by each department.
- Rate-Based ABC simplifies this, using pre-agreed rates where a simpler, faster calculation is preferred over exact usage.
Jamie Dimon’s allocations
Jamie Dimon, CEO of JPMorganChase Bank, emphasized the importance of expense allocations in his 2024 shareholders letter. According to Dimon, capacity in the computer centre, their in-house reflection of our AWS example, was charged out to the entire company. And this was no minor operational cost. But not all departments of JPMorganChase Bank actually used or benefited from this computation.
Essentially, wings of the business that availed extensively of this computer centre were being subsidized by those who could do without. Dimon made it his mission to fix this. Because without a good grasp of your costs and expenses, the business suffers. It becomes impossible to set accurate, profitable and competitive prices. It becomes impossible to accurately predict when to enter a new market, or abandon a lagging one.
Why Information makes Allocation work
Information (timely, meaningful data) is key to running any major enterprise in 2026. In many ways, expense allocations are at the root of competitive business dynamics. Knowing where to direct resources, which products to launch, or when to switch strategies. Without accurate and sufficiently accurate expense allocations, these decisions can not be made on a good basis.
As Dimon says; “It’s important to be vigilant when you analyze expenses because things always morph, always go bad. Don’t assume allocations are okay. The computer centre example was a huge misallocation of capital. I’m still quite sensitive about that.”
For more on this topic, continue the CostPerform blog series with this piece on trends affecting banks in 2026.
