Definition of Cost Pool
A cost pool is an accounting method that groups similar costs together. These costs are typically indirect costs, such as overhead, and are associated with a specific department or service within an organization. Cost pools help organizations allocate indirect expenses more precisely and accurately across different departments, projects, products, or services. The allocation methods may vary, including direct labor hours, machine hours, or activity-based costing (ABC).
A noteworthy term linked to cost pools is activity cost pool, which is essentially more refined and is used within the realm of activity-based costing. Activity cost pools are used to allocate overhead costs based on specific activities that are the actual cost drivers.
Examples
- Manufacturing Department: In a manufacturing company, the costs associated with running the machinery (such as machine maintenance and electricity) can be grouped into a cost pool. These costs are then allocated to different products based on machine hours used.
- Customer Service Department: All costs associated with the customer service department (e.g., salaries, utilities, and office supplies) can be pooled together. These costs can then be allocated to different product lines based on the number of customer service hours logged for each product.
- IT Support Services: In a corporate setting, IT support costs (comprising licensing, salaries for IT staff, and hardware maintenance) may form a cost pool allocated to various divisions based on actual service requests or the number of employees in each division.
Frequently Asked Questions (FAQs)
-
What is the purpose of using cost pools in accounting? Cost pools are used to streamline and improve the accuracy of accounting by systematically grouping similar costs. This improves overhead allocation, enhancing cost control, pricing decisions, and financial analysis.
-
How do cost pools relate to activity-based costing (ABC)? In activity-based costing, cost pools are used to accumulate costs associated with specific activities. This helps in accurately tracing and allocating overheads to products or services based on actual cost drivers.
-
Can multiple cost pools be used in one organization? Yes, organizations often use multiple cost pools to manage indirect costs for different departments, functions, or activities more accurately.
-
What are some common bases for allocating costs from a cost pool? Common bases include direct labor hours, machine hours, square footage, units produced, or activity-based metrics like the number of transactions processed.
Related Terms
- Activity-Based Costing (ABC): A costing method that allocates overhead and indirect costs to related products and services based on the actual cost-driving activities.
- Overhead Costs: Indirect expenses that cannot be directly traced to a specific product but are necessary for the general operation of the company.
- Cost Allocation: The process of assigning indirect costs to different departments, projects, or products.
- Indirect Costs: Costs that are not directly attributable to a specific product or service but are necessary for the functioning of an organization.
Online Resources
- Investopedia on Activity-Based Costing: Link
- Explanation of Cost Pools on AccountingTools: Link
- Understanding Indirect Costs by the Project Management Institute: Link
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan: This book offers comprehensive coverage of cost accounting principles, including cost pools and activity-based costing.
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer: This book includes fundamental concepts of cost accounting with practical examples relevant to cost pooling.
- “Activity-Based Costing and Activity-Based Management for Health Care” by Judith J. Baker: While tailored for healthcare, this book provides insights into ABC and cost pooling that are applicable across many industries.
