1. Unit-Based Allocation
How it works:
Miscellaneous variable costs are distributed evenly across every unit on the purchase order (PO).
Formula:
Impact:
Each unit, regardless of its price or value, absorbs the same additional cost.
Example:
If a PO has 1,000 total units across 10 SKUs, and the freight bill is $1,000, then each unit absorbs $1.00.
Best used when:
Costs scale with physical quantity, such as:
- Freight based on weight or volume
- Per-unit handling fees
2. Value-Based Allocation
How it works:
Miscellaneous variable costs are distributed proportionally based on the dollar value of each line item in the PO.
Formula:
Impact:
- Higher-value SKUs absorb more cost
- Lower-value SKUs absorb less cost
Example:
If a PO has $80,000 in shoes and $20,000 in hats, and the freight bill is $1,000:
- Shoes are allocated $800
- Hats are allocated $200
Best used when:
Costs are tied to the value of goods, such as:
- Insurance
- Duties and tariffs
- Ad-valorem fees
Comparison Table
| Method | How Costs Are Distributed | Best When Costs Relate To… | Example Cost Types |
| Unit-Based | Evenly across all units | Quantity or physical handling | Freight (by weight/volume), per-unit handling fees |
| Value-Based | Proportionally by line item value | Monetary value of goods | Insurance, duties, tariffs, ad-valorem fees |