The issue of behavioral considerations in cost allocation has been discussed and debated extensively in behavioral management accounting literature. During the past few decades, researchers have identified a number of behavioral dimensions for cost allocation. This paper reports the results of an empirical study designed to examine the important behavioral considerations of cost allocations. The data for the study was collected from finance managers using a questionnaire survey. The empirical evidence identifies four behavioral considerations which influence cost allocation. The relevance of developing a more comprehensive understanding of the behavioral aspects of cost allocation is becoming important, especially in Indian companies.

In recent years, a growing number of studies on the issue of cost allocations based on different institutional theories have emerged in the management accounting literature. Although researchers have explored the adoption of various cost allocation procedures to explain the cost allocation practices across a wide range of organizations, there exists little work on the behavioral aspects of cost allocation with reference to Indian companies.

Cost allocation has been considered to be an important topic in behavioral finance, and often tends to influence the behavior of the participants within a system. In fact, these participants have the ability to control managers through the effect of cost allocations on performance measures (Morse and Zimmerman, 1997).

Since cost allocation methods are components of the overall performance evaluation, an issue of particular importance to management accountants as well as designers of cost allocation is - whether one must consider the behavioral aspects of cost allocation methods while designing a cost allocation system.

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