Concurrent tolerance allocation has been the focus of extensive research, yet very few researchers have considered how to concurrently allocate design and process tolerances for mechanical assemblies with interrelated dimension chains. To address this question, this paper presents a new tolerance allocation method that applies the concept of concurrent engineering. The proposed method allocates the required functional assembly tolerances to the design and process tolerances by formulating the tolerance allocation problem into a comprehensive model and solving the model using a non-linear programming software package. A multivariate quality loss function of interrelated critical dimensions is first derived, each component design tolerance is formulated as the function of its related process tolerances according to the given process planning, both manufacturing cost and quality loss are further expressed as functions of process tolerances. And then, the objective function of the model, which is to minimize the sum of manufacturing cost and expected quality loss, is established and the constraints are formulated based on the assembly requirements and process constraints. The purpose of the model is to balance manufacturing cost and quality loss so that concurrent optimal allocation of design and process tolerances is realized and quality improvement and product cost reduction is achieved. The proposed method is tested on a practical example.