Activity Cost Pool

What Is an Activity Cost Pool?

An activity cost pool is an aggregate of the multitude of costs associated with playing out a specific business task, like making a specific product. By pooling all costs incurred in a specific task, getting an accurate estimate of the cost of that task is more straightforward. An activity cost pool incorporates both fixed and variable costs and is a transitory account, utilized exclusively to find out about how much a certain activity costs a business.

Understanding an Activity Cost Pool

Activity cost pools are utilized in activity-based costing (ABC), a common method for deciding production costs. This method assigns fixed and variable costs, or overhead and indirect costs, to related products and services, permitting a company to understand the true cost of a product, service, or task.

One illustration of the utilization of activity costs is in manufacturing. A manager might be approached to assess the production costs of every product delivered by a factory. ABC characterizes production as comprising of various activities, and it assigns costs to those activities.

For instance, machine set-up may be one activity associated with creating a specific product, and the set-up cost would be one cost remembered for an activity cost pool. Purchasing materials may be one more cost assigned to the pool. Those two costs and any others would contain the activity cost pool.

Assigning costs accurately is important to decide the profitability of products and accordingly to go with rational production choices, especially to improve efficiency and profit margins.

Activity-Based Costing versus Traditional Costing

ABC contrasts from traditional costing methods. Traditional costing is product-based and period-based. Product-based costs incorporate materials, labor, and overhead while period-based costs incorporate sales, general costs, and administration (SG&A).

These are charged against revenue for each accounting period. As per a few managers, dispensing these costs to the production of products can create mutilated estimates, particularly on the off chance that a factory produces a wide range of products. In any case, for a company with a single product, traditional costing and ABC would deliver comparative product cost estimates.

The advantage of ABC is that it ties activity costs all the more straightforwardly to production. It accomplishes this by eliminating the differentiation among product and period-based costs. What's more, under ABC, products are not allocated costs of unused capacity. The comparison between traditional costing methods and ABC gives an opportunity to bits of knowledge connected with areas of waste, underutilized capacity, and some other cost that doesn't straightforwardly support productivity — and arriving at conclusions about these experiences.

Under traditional costing methods, some portion of purchasing costs may be assigned to a product paying little heed to how much genuine purchasing activity was required. ABC would look to survey genuine purchasing activity associated with a specific product. Moreover, unused capacity could likewise be assigned to a product, possibly contorting its cost.

ABC isn't utilized exclusively in manufacturing businesses. It might likewise be applied to service businesses.

Illustration of an Activity Cost Pool

Shoemaker and Sons produce excellent cowhide shoes. It is a family business of a couple of employees that makes handcrafted shoes. The primary divisions of the company incorporate the research and development of the shoes, the production of the shoes' parts, and the assembly of the shoes.

The costs of causing the shoes to incorporate the rent for the factory, the cost of the raw materials, the cost of machines, and the cost of labor. The total costs for the month are $35,000.

The total cost can then be allocated to the different divisions as activity cost pools based on what appears to be legit. For instance, the rent for the factory wouldn't be remembered for the research and development cost pool as research and development wouldn't utilize factory space. The activity cost pool permits Cobbler and Sons to better comprehend where its costs come from, which thusly permits it to better deal with its costs.

Features

• Activity cost pools help to accurately assign costs, which is important in deciding the profitability of products and pursuing production choices to further develop profit edges.
• An activity cost pool is an aggregate of the multitude of costs associated with playing out a specific business task.
• Activity cost pools are utilized in activity-based costing, an accounting method that is commonly utilized in production and manufacturing.
• An impermanent account, an activity cost pool, incorporates fixed costs and variable costs and permits a business to accurately estimate the cost of a specific task.