Cost pool

Definition

A cost pool is an aggregation of individual costs, typically by department or service center, from which cost allocations are made later. It simplifies the process of assigning costs to various products or services.

5 Must Know Facts For Your Next Test

1. Cost pools group similar types of costs together for more accurate allocation.
2. They are essential in Activity-Based Costing (ABC) to allocate overhead costs effectively.
3. Common bases for creating cost pools include activities, departments, and processes.
4. The accuracy of product costing improves when indirect costs are allocated from relevant cost pools rather than a single overhead rate.
5. Cost pools help in identifying inefficiencies and areas where cost control can be improved.

Review Questions

• What is the primary purpose of a cost pool in managerial accounting?
• How does using multiple cost pools improve the accuracy of product costing?
• Why are cost pools important in the context of Activity-Based Costing?

Related terms

Activity-Based Costing (ABC): A costing method that assigns overhead and indirect costs to related products and services using multiple cost drivers.

Overhead Costs: Costs that are not directly tied to production but are necessary for running a business, such as rent, utilities, and administrative expenses.

Cost Driver: A factor that causes changes in the cost of an activity; used as a basis for allocating costs within a cost pool.