Cost allocation refers to the distribution of costs among consumer classes. Utility service is produced for different customer classes using the same facilities. As a result, it is difficult to indentify separate marginal costs for each customer class because a large part of the costs are common or joint.
However, utility is produced for different customer classes in variable proportions, and separate marginal production costs can be identified as the increment to the total cost of the joint production process when output to one customer class is increased by one unit, holding the output of other customer classes fixed.