Cost allocation is just the process of assigning support or overhead costs to directly productive categories: products, regions, plants, marketing arms, etc. Primarily, there are two reasons why this must be done. First, some decisions depend on accurate full, or all-in, costs. These decisions include pricing, facilities, make-or-buy, and many others.
Second, allocation is necessary for reporting. The SEC requires accurate reporting of results by line-of-business. This in turn requires accurate cost allocation. Further, organizational decisions, such as compensation, depend on accurate reporting of results.