Assign (Accounting)

To assign, in accounting, most often means to attach a cost to a cost object, such as a product, job, department or customer, so that the cost of that object can be measured. Cost assignment is the umbrella term for the two ways this is done: tracing costs that can be linked directly to the object, and allocating shared costs that cannot. In a second, unrelated sense, a business assigns its receivables when it pledges them to a lender as security for a loan.

Both meanings are common in US accounting texts, and context makes clear which is intended. "Overhead is assigned to jobs" refers to costing. "The company assigned its receivables to the bank" refers to financing, described more fully under assigned accounts receivable.

A wedding caterer wants to know what each wedding really cost. The salmon and the waiting staff hired for one event can be written straight against that wedding. The van, the kitchen and the owner's time are shared across every event, so the caterer has to decide on a fair way to share them out, perhaps by the number of guests. Both steps together are what accountants call assigning costs.

Assigning receivables is quite different. It is like handing a lender your list of customers who owe you money and saying, "if I don't repay you, collect from them".

Cost assignment works in two steps:

• Tracing. Direct costs, such as direct materials and direct labor, are attached to a product using records that show exactly how much each one used: material requisitions, time sheets and bills of materials. Tracing is accurate and should be used wherever it is economically feasible.
• Allocation. Indirect costs, such as factory rent, utilities and supervision, cannot be traced to individual products, so they are spread using a basis such as machine hours. The process is described under allocation, and for factory costs it produces applied overhead.

For example, a job uses $3,000 of traced materials, $2,000 of traced labor and 50 machine hours. If overhead is assigned at $40 per machine hour, the job's total assigned cost is $3,000 + $2,000 + $2,000 = $7,000.

Assigned costs feed into inventory values on the balance sheet, into cost of goods sold, into pricing and into decisions about which products, customers or branches to keep. Poor assignment, such as spreading all overhead on direct labor in a highly automated plant, can make simple high-volume products look more expensive than they are and complex low-volume products look cheaper. Activity-based costing was developed to improve assignment by linking overhead to the activities, such as setups and inspections, that actually cause it.

In the financing sense, a company that needs cash can assign specific accounts receivable to a lender. The company, the assignor, remains the owner of the receivables and usually continues to collect them, but promises to use the proceeds to repay the loan. Under a general assignment, all receivables secure the borrowing; under a specific assignment, particular accounts are named and the lender, the assignee, may notify the customers.

Assignment differs from factoring, in which the receivables are sold outright and usually removed from the seller's balance sheet. In an assignment the receivables stay on the books, and the loan is recorded as a liability. Suppose a company assigns $200,000 of receivables and borrows $150,000. It debits Cash $150,000 and credits Notes Payable $150,000, and discloses in its notes that $200,000 of receivables have been pledged as collateral, so readers know those assets are not freely available to other creditors.

In contract law, to assign is to transfer rights under a contract to another party, as explained under assignment of contract. Leases, insurance proceeds and royalty streams can all be assigned. In payroll, a wage assignment is a voluntary arrangement directing part of an employee's pay to a creditor. Each use shares the same core idea: something, whether a cost, a right or a stream of cash, is formally attached to a particular object or party.