Introduction –
Consortium of the individual costs is also known as cost pool, mostly by a department or through a service centre. The main motto of costs pool is to collect all the costs with the same characteristics and to assign them to different cost objects like products, departments, services etc, based on the basic measure also known as cost drivers. Besides all of that, cost pools are mainly used in cost accounting, especially in an ABC – i.e. activity-based costing and also job costing systems, which in turn makes the process of cost allocation or assignment simple. Besides all of that, by collecting the costs at the pool level, any business can more aptly distribute costs to services or products that eat resources. Broaden your horizons more on calculating pool costs before installation of the pool.
Occurrences of Cost Pools –
For instance, a business organization or a firm has a manufacturing department and also a marketing department. So, each of these departments can be known as cost pool, which comprises of costs linked with that department. In the manufacturing cost pool, the price can comprise of raw materials, labour, and manufacturing overhead. Besides all of that, in the area of marketing cost pool, the cost can comprise of ads expenses, marketing staff salaries, and price of market research. Besides all of that, cost pools are pivotal in making sure that costs are collected perfectly and in a fair manner, so that they can assists the management in making informed choices about financial analysis, budgeting and pricing.
Examples of Cost Pooling –
Let us have a look at some of the simplest scenes from daily life, in which a furniture manufacturing company is there that makes 2 products i.e. tables and chairs. Besides all of that, the firm/company bears the cost of 3 distinct departments, each of which can be known as cost pool. Material cost pool, labour cost pool, and overhead cost pool – the cost of the raw materials which shall be used to produce the products (material costs), the cost of labour involved in creating the products (labour costs), other costs which is connected with manufacturing like utilities, depreciation, and rent on machinery and so on. (overhead cost). Let’s look at the given period, the cost will be as follows –
- Overhead Cost Pool will be $5,000
- Labour Cost Pool will be $15,000
- Material Cost Pool will be $10,000.
These are some such costs that requires to be collected to the company’s product (tables and chairs) to identify the cost of producing every product. Besides that, the organization will decide to use the no. of units produced as cost driver for the labour and material costs, machine hours as the cost driver for overhead costs.
