What is Meant by the Term “Cost Pool”

What is Meant by the Term “Cost Pool”

“Cost pool” is a term that you will generally see in cost accounting. This type of accounting is a branch of management accounting, which refers to the preparation of reports regarding business operations. Apart from hiring an accounting firm in Johor Bahru to help business owners with financial accounting, they should also pay attention to cost accounting. This is because when used together, financial accounting and cost accounting will be very helpful in cost reduction, hence helping to increase the company’s profitability (Also see What is in a Profit and Loss Statement?).

In cost accounting (Also see Differences Between Financial Accounting and Cost Accounting), people will often use the cost pool in some costing strategies. This is for them to know how much the company needs to pay for a certain department or services in a particular period. The term “cost pool” refers to the amount of money the company (Also see Changing from Unlimited Companies to Limited Companies) has spent on an activity. Cost pools play a great role in activity-based costing as people can use it to identify where the business has spent its money, rather than dividing the overhead expenses equally and allocate them to all the departments.

Typically, business owners who run their business in the manufacturing sector would use cost pools as this makes the process of cost allocation on the products and services easier. By using the cost pools, you will be able to allocate the cost incurred in a very detailed manner compared to standard costing methods like the cost of goods sold (COGS). This is for you to see where you spent your money, and you will be able to determine the expenses incurred to manufacture and sell the products.

After knowing the amounts that you have spent on each activity, you can make the corresponding changes if necessary. This is because you can allocate the costs incurred in a highly refined level if you use the cost pools. As an example, if you use the standard costing method, you may only be able to allocate your costs based on how many hours the machines have been operating. However, if you use the cost pools, you will be able to allocate costs according to expenses spent on labour, inspections, the process of taking orders from customers, other than the number of hours the machines run.

If you want to create cost pools, the first thing you need to do is to identify the amount of overhead costs the business has spent at the time you started working on the calculation. Next, you should determine the activities which are related to the sum of overhead costs before grouping them into the cost pools. This helps you to determine the amount of money your business spends. Then, identify the activities for each cost pool as well as the methods that you would use to measure them. As an instance, one of your cost pools may be for the production process, and the method to measure them is by using the number of units manufactured.

People will always use the cost pools in activity-based costing methods for them to allocate costs for various activities. After identifying the costs pools and the methods of measuring them, you can allocate the overhead expenses to those cost pools. To do this, you can ask your staff about the amount of time they spend on those activities. Also, you can make an estimation on the sum of overhead expenses each cost pool requires.

As soon as you have allocated the sum of overhead expenses for all the cost pools, you need to calculate the activity rate by dividing the costs related to a specific cost pool by its measurement. As an example, Amy has allocated RM300,000 in the cost pool for the production process. In that accounting period, her company has produced 100,000 units of products. Thus, to calculate the activity rate, she needs to divide RM300,000 by 100,000, and the resulting amount will be RM3 per unit.

Lastly, you can determine the amount of money you have spent on each unit of products you sell. By taking the example above, Amy has spent RM3 to produce each unit. If her company (Also see Things You Should Consider Before Registering Your Firm) has sold 5,000 units in an accounting period, this means that she has spent RM15,000 on that type of product.

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