Cost Pools

Date: July 27, 2008
Time: 11 PM
Place: Kitchen

Increasing the number of cost pools generally increases the accuracy of cost allocation if the costs in the pool are appropriate- the costs in the pool need to be similar. Items used in cost pools are similar if when broken down into smaller pools, their behavior to different allocation bases remains the same.

Accuracy is improved since you're getting more specific. For example, a manufacturing firm that produces items in different subplants should not lump the salaries of all the staff in one overhead cost pool. If the salaries are assigned to cost pools for individual subplants, then costs allocated to products produced will be more accurate.

In order to price a product or service, you need to know it's true cost. Allocating incorrectly- undercosting and overcosting products can land the company to deep financial problems.