What methods are available to allocate service department costs and why is allocation necessary?

There are many basis for the allocation of costs. But first a word about the necessity to allocate costs. Let's say that your company makes widgets. The cost of materials and direct labor to make the widgets can be determined pretty easily. However there are other costs involved in making the widgets. Utilities cost, insurance cost, supervision and management salaries, and other costs of services to make the product. These indirect costs may be difficult to link to a specific widget. Take utilities for example. If utilities cost $1,000 for the month, and we produced 100 widgets, then each widget could be allocated $10 of the utilities cost. We could also allocate utilities by the number of machine hours each widget used. We could allocate utilities based on the amount of space needed to produce certain ones of the widgets, if applicable. Any reasonable or logical basis can be used to allocate costs that are not easy to link to a specific product.