Cost Pool

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 costingActivity-based CostingActivity based costing (also known as ABC costing) refers to the allocation of cost (charges and expenses) to different heads or activities or divisions according to their actual use or on account of some basis for allocation i.e. (cost driver rate which is calculated by total cost divided by total no. of activities) to arrive at a profit.read more 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 driversCost DriversA cost driver is a unit that derives the expenses and sets a basis on which a particular cost is to be allocated between the different departments and on the basis of that driver’s activity completed in that particular period the cost is allocated. These are the structural determinants of the activities on which cost is being incurred and determine the behavior of the costs on an activity.read more. 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?

Cost Pool

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To create a cost pool for the costing strategy, first, the businesses need to identify the amount of overheadOverheadOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more 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.

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

Disadvantages