What Are the Different Types of Cost Pools? Overview,7 Facts

A Cost Pool is a type of cost strategy that identifies the costs spent by each department or service area of an organization. It assists in determining the overall expenditures involved in manufacturing items and assigning those expenses to the various departments or service sectors based on a cost driver.

Here at what are the different types of cost pools, we’re going to tell you what are the different types of cost pools available and which one is the most effective for your needs.

What Are the Different Types of Cost Pools?

Activity-based costing is a cost accounting system that allocates manufacturing costs based on production activities. Cost pools represent the indirect costs from each activity that affects the activity-based costing process.

Three different types of cost pools are most common in this system: overhead, indirect materials, and indirect labor. While each item is necessary to produce goods or services, the costs for the items are not directly traceable to an individual product.

What Are the Different Types of Cost Pools?

Hence, a cost pool and cost driver allocate these costs to all goods and services produced in a given time period.

Overhead Cost Pools

All expenditures that directly or indirectly impact a company’s overall manufacturing process are included in overhead cost pools.

Depreciation of equipment or structures, managerial salaries, property taxes, security fees for items or buildings, and other comparable expenses come under this category.

Accountants must consolidate these overhead expenses into a single pool and then apply them to all manufactured goods at once. Typically, this is the most prevalent cost pool in activity-based costing.

The cost driver may be labor hours, machine hours, or any activity that exemplifies how overhead expenses are applied to products.

Indirect Materials

Indirect materials are any elements required for the production of goods that cannot be connected directly to a particular item or batch of goods. Solder is required to build connections on an electrical circuit board, for instance.

The manufacturing division may use the solder for various boards manufactured over an extended period of time. Solder is therefore an indirect substance. Any material with a comparable function in the manufacturing process goes under indirect materials cost pools for further cost allocation in activity-based costing.

What Are the Different Types of Cost Pools?

Indirect Labor

Indirect labor is the last category in these cost pools. This category normally contains data on hourly earnings for all employees that do not have a direct influence on the manufacturing process.

Typical examples are maintenance personnel and quality control inspectors. These persons may have a little influence on the manufacturing process, but this cannot be linked to a specific item or batch of items.

This cost pool’s information frequently corresponds to a certain internal production time period.

G&A Pool

G&A expenditures are those incurred to operate or manage the business as a whole. Therefore, they cannot be linked to a particular project, contract, order, product, or division. Typical examples include executive management, accounting and finance, legal, personnel and culture, technology, business development, marketing, and sales.

Examples of G&A costs include the following:

  • Executive compensation;
  • Staff compensation for responsibilities such as legal, accounting, and public relations; and Selling and marketing costs.

The common allocation grounds for the G&A pool are as follows:

  • Total cost input: G&A is applied to all costs that are not G&A.
  • Value-added G&A:Subcontracts, direct materials, and G&A pool charges are removed from the allocation base, resulting in a higher G&A rate compared to the total cost input approach.
  • Single cost element:This term is uncommon, yet it encompasses all expenses of a selected constituent (say, all direct labor costs).

What Are the Different Types of Cost Pools?

Fringe Pool

To recruit and retain staff, auxiliary expenditures are incurred. These may include employer-paid taxes, health insurance, 401(k) contributions, bonuses, paid absences, etc. Typically, expenses are distributed based on total labor costs, which include direct and indirect work, bid and proposal labor, and internal R&D labor.

Facilities Pool

A facilities pool is an intermediate pool that records expenditures such as rent, utilities, depreciation, and other maintenance expenses, and then assigns them based on square footage or headcount to final indirect pools.

Cost Pool Best Practices

Accounting for a large number of cost pools can be costly, therefore examine the additional advantage of adding more cost pools. In many situations, it is more cost-effective to limit the number of cost pools to a level that still produces usable data.

How to Create Cost Pools?

To create a cost pool for the costing method, organizations must first determine the quantity of time-specific overhead expenses. The next stage for the firm is to determine the activities associated to the amount of overhead expenses incurred and then aggregate them into a pool.

It will assist them determine how the company spent its money. The company management will then be able to identify these cost pools and learn how to quantify them.

Example of Cost Pool

Mynx is a manufacturing facility with many divisions that produce various items. For instance, one of the aforementioned divisions makes eyewear and allocates overhead expenses using activity-based costing.

The department of eyewear consists of three primary divisions: design, molding, and assembly. The departments’ combined overhead expenses equal to $50,000.

What Are the Different Types of Cost Pools?

By doing cost pool analysis, the cost manager is able to identify 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 may assess these three distinct pools depending on the cost drivers, and then split the total cost of $50,000 across the three pools.

This approach of cost allocation is therefore more exact and dependable than predicting expenses or dividing the whole cost evenly. In addition, many cost factors, such as machine hours, do not apply to all pools.

Uses of Cost Pool

Utilized by the manufacturing sector since it allows them to distribute expenditures in accordance with the requirements for producing goods and services.

It facilitates the allocation of expenses at a highly granular level.

It is used to determine how money was spent and to forecast accurately how much it will cost to develop and market a product.

Advantages of Cost Pool

Calculating Overhead Rates: Enables a company to calculate each department’s overhead expenses, which aids in determining the overhead rate for each manufactured product.

Efficient Use of Wealth: With the use of a cost pool, the optimal method for allocating money may be determined, hence maximizing the wealth of a corporation.

Budgetary Control: It is also beneficial to accurately predict the budget necessary for the company to create a product within a given timeframe.

Disadvantages of Cost Pool

What Are the Different Types of Cost Pools?

Excludes Some Manufacturing Costs: Using this approach, certain manufacturing costs, such as the cost to heat the facility, are omitted from the product’s total cost.

Time Consuming Method: It is more time-consuming than conventional approaches since collecting data and identifying the cost drivers requires considerable effort.

Conclusion

Once the cost pools have been established, accountants must identify the cost driver that most effectively assigns these costs to commodities. Standard guidelines for activity-based costing allow each activity to have its own cost driver.

Accountants frequently pick the cost driver that best allots expenses for a certain task. Only the indirect materials, indirect labor, and indirect overhead for each activity correspond to the relevant cost driver.

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