Activity Cost Pool
An activity cost pool is a collection of costs associated with a specific activity or group of activities in an organization. Activity cost pools are used in activity-based costing (ABC) systems to more accurately allocate overhead costs to products or services based on the activities that drive those costs. By grouping costs into cost pools, an organization can better understand the relationship between the activities performed and the costs incurred.
Each cost pool is assigned a cost driver, which is a measurable factor that influences the cost of an activity. The cost driver serves as a basis for allocating the costs in the cost pool to the products or services that use the activity.
Example of an Activity Cost Pool?
For example, in a manufacturing company, some common activity cost pools might include:
- Materials handling: Costs associated with receiving, storing, and distributing raw materials and finished goods. The cost driver for this cost pool could be the number of material movements or weight of materials handled.
- Machine setup: Costs associated with preparing machines for production runs, such as labor, equipment, and tooling costs. The cost driver for this cost pool could be the number of setups or setup hours.
- Quality inspection: Costs related to inspecting and testing products to ensure they meet quality standards. The cost driver for this cost pool could be the number of inspections or inspection hours.
By using activity cost pools and their associated cost drivers, companies can more accurately allocate overhead costs to products or services, which leads to better decision-making in areas such as pricing, resource allocation, and process improvements.