Cost Pool Definition
A Cost Pool is a kind of cost strategy to identify the cost incurred by the individual departments or service sectors of the business entity. It helps in finding out the total of expenses incurred in manufacturing goods and in allocating the same to the different departments or service sectors based on some reasonable identifier known as a cost driver.
Cost Pool can also be used in activity-based costing to estimate the cost which is incurred in performing certain tasks in a business. By doing so, it assists in the allocation of the expenses to the various departments accurately according to the cost drivers. Cost drivers are the allocation criterion used to allocate the costs between different departments and sectors such as the number of units produced, the number of electricity units consumed, the number of labour hours consumed, etc.
How to Create Cost Pools?
To create a cost pool for the costing strategy, first, the businesses need to identify the amount of overhead of the business incurred during a specific time. The next step for the businesses is to identify the activities related to the amount of overhead that has been incurred and then groups these activities into the pool. It will help them in ascertaining how the business spent the money. The business management will then be able to identify it and attain knowledge as to how to measure those cost pools.
Example of Cost Pool
Mynx is a manufacturing plant that has several departments producing different products. One of the above department produces sunglasses and applies activity-based costing for the allocation of overheads. The department of sunglasses comprises 3 main pools, namely designing, moulding, and assembly. The total amount of overheads incurred by the departments is $50,000.
4.9 (1,067 ratings) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
By the application of cost pool analysis, the cost manager identifies the following cost drivers:
- Number of hours of maintenance
- Machine hours
- Labour hours
- Number of units produced
- Factory square foot area utilized.
The cost manager can perform an analysis of these three different pools based on the cost drivers, and the total cost of $50,000 can be divided between the three pools.
Hence, this method of assigning costs is more precise and reliable than the estimation of expenses or splitting the total cost equally. Moreover, some cost drivers like machine hours do not apply to all pools.
Uses of Cost Pool
- Used by the manufacturing sector as it helps them in allocating costs according to the requirement in manufacturing products and services.
- It helps in allocating costs at a highly-refined level.
- It is used to know how the money was spent and also helps in making an accurate estimate of how much it will cost for creating and selling a product.
Advantages
- Calculating Overhead Rates: Enables a business to determine the overhead costs of each department which help in ascertaining the overhead rate of every product manufactured.
- Efficient Use of Wealth: With the help of cost pool, the best way of allocating wealth can be known, which results in maximizing the wealth of a business.
- Budgetary Control: It is also useful to properly estimate the budget for the business to manufacture a product in a specific time can be identified.
Disadvantages
- Excludes Some Manufacturing Cost: While using this method, some manufacturing costs get excluded from the product costs, such as the cost to heat the factory may not be included in the cost pool.
- Time Consuming Method: It is time-consuming than the ordinary methods as the data collection, and the identification of the cost drivers takes much time.
Recommended Articles
This has been a guide to Cost Pool and its definition. Here we discuss how to create it along with examples, advantages and disadvantages. You may learn more about financing from the following articles –
