Lattice allocations: A better way to do cost allocations

This paper describes a new cost allocation technique that we call “lattice allocation.” The technique uses matrix algebra operations such as in standard spreadsheet software to perform complex cost allocations. To illustrate the power and versatility of the technique, we provide two examples. First, we show how lattice allocations can allocate service department costs to fully recognize mutual services among service departments, similar to the reciprocal method but without the complexity of solving a set of linear equations. Second, we show how lattice allocations can implement two-stage activity-based costing in a single step. The lattice allocation method is easy to apply, requires no special software for small organizations, easily scales up to medium and large organizations, and provides managers better information about the origins of allocated costs. Also, lattice allocations are likely to produce more accurate results than traditional techniques and are well-suited as a pedagogical tool for cost accounting courses. The paper suggests future research topics, including the implications of lattice allocations for Fast Close, Continuous Reporting, and government contractor cost accounting requirements.