Any business with more than one department eventually runs into shared costs — rent, utilities, a shared software subscription, an office manager's salary — that don't belong cleanly to any single department but still need to be accounted for somewhere. How you divide those costs, the "allocation basis" you choose, has a real effect on which department's numbers look healthy and which don't.
Headcount
Dividing a shared cost by the number of people in each department is simple and intuitive, and works well for costs that genuinely scale with people — software licenses, office supplies, a portion of HR overhead. It works less well for costs that have nothing to do with staffing levels, like a warehouse lease.
Square footage
For costs tied to physical space — rent, utilities, cleaning, insurance on a facility — allocating by the square footage each department actually occupies is usually the most defensible method. A department using twice the floor space is genuinely responsible for roughly twice the facility cost, in a way headcount doesn't capture.
Revenue
Allocating by each department's share of total revenue is common for costs that scale with business activity broadly — a general marketing budget, or executive overhead. The risk with this method is that it can make a high-revenue department look artificially less profitable simply because it's carrying a larger dollar share of the shared cost, even if it didn't actually drive that cost higher.
Equal split
Sometimes the honest answer is that a cost genuinely benefits every department equally, regardless of size — a company-wide holiday party, a general legal retainer. An equal split across departments is the right call here, even though it's the least commonly used of the four methods.
Why the choice matters more than it seems
The same total shared cost, allocated four different ways, can shift a department from looking profitable to looking like a loss center — not because anything about the business changed, but because the allocation method changed. Choosing a method that actually reflects what's driving the cost, rather than defaulting to whichever is easiest to calculate, is what makes department-level profitability numbers trustworthy.