Cost Allocation in cloud computing is a critical practice that involves the classification and distribution of cloud costs based on resource usage. It works by tracking the consumption of cloud resources by different entities within an organization - be it a department, project, or business unit. Once the usage is tracked, the associated costs are then assigned to these entities, ensuring that each unit is accountable for its own cloud usage.

Cost Allocation works by assigning the costs of cloud resources to the entities that use them. This is typically done using tags, which are metadata that you can add to your cloud resources. By tagging resources with details such as the department, project, or business unit that they belong to, you can track their usage and allocate costs accordingly.

Cost Allocation helps organizations understand exactly where their cloud spending is going, which is crucial for budgeting, cost management, and financial reporting. It also promotes accountability and can help identify areas for cost optimization.

For instance, a tech company might use cloud services across different departments. By using cost allocation, the company can assign the costs of compute instances to the software development team, the costs of storage to the marketing team, and the costs of databases to the customer support team. This allows the company to accurately track and manage its cloud costs, and identify which departments are driving the most costs.