What Is Cost Pool And Cost Driver?

What does cost driver mean?

Activity Based CostingA cost driver is the unit of an activity that causes the change in activity’s cost.

Activity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product.

The cost drivers thus are the link between the activities and the cost of the product..

What is an example of a cost driver?

An example is a change in the cost of warehousing or a change in the level of production. More technical cost drivers are machine hours, the number of engineering change orders, the number of customer contacts, the number of product returns, the machine setups required for production, or the number of inspections.

What is the advantage of having two cost pools?

Having two cost pools for each service department allows costs to be allocated more directly on the basis of the cost drivers used to produce each output. This will result in increased product cost accuracy. This will also make it easier for managers to monitor and analysis cost behaviour.

What does cost pool mean?

Cost pools is an accounting term that refers to groups of accounts serving to express the cost of goods and service allocatable within a business or manufacturing organization. … Cost pools consists of overhead costs administrative costs.

What are the types of cost drivers?

Types of Drivers in Cost AccountingNumber of set-ups.Number of machine hours.Number of processed orders.Number of orders completed.Number of labor hours.Number of orders packed and delivered.

What is a cost pool examples?

December 25, 2019. A cost pool is a grouping of individual costs, typically by department or service center. Cost allocations are then made from the cost pool. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those departments using its services.

How do you get a cost pool?

To create cost pools for your costing strategy, you will first need to find out how much overhead the business had during the time frame you are measuring. Then, you will identify the activities that were associated with the amount of overhead, and group them into cost pools.

What is a cost Centre?

A cost center is a department or function within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company’s profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions.

How do you identify cost drivers?

Volume: The cost driver is based on units of work (e.g., number of orders.) The cost of the activity increases as more units are processed. Time: The cost driver is based on the length of time taken to complete the activity.

Does increasing the number of indirect cost pools?

No–increasing the number of indirect-cost pools does not guarantee increased accuracy of product or service costs. –>If the existing cost pool is already homogeneous, increasing the number of cost pools will not increase accuracy.

What makes a good cost driver?

Cost drivers are the elements of a business that cause an overhead cost against the goods manufactured or services provided. Some cost drivers are necessary and unchangeable while others place a high than needed overhead cost against production.

Do fixed costs have cost drivers?

A fixed cost does not have an activity or driver that makes the cost increase as the activity or driver increases.