Skip to main content

22.5 Explain and Identify Cost Pools and Cost Drivers

Cost Pools​

Cost pool is a grouping of individual costs, typically by department or activity. In ABC, cost pools are organized by activity.

Purpose:

  • Group related costs together
  • Simplify cost allocation
  • Organize overhead costs

Examples of Cost Pools:

  • Setup cost pool
  • Inspection cost pool
  • Ordering cost pool
  • Processing cost pool
  • Packaging cost pool

Creating Cost Pools​

Process:

  1. Identify activities
  2. Group related costs
  3. Create cost pool for each activity
  4. Total costs in each pool

Example:

  • Setup activity: Setup labor €3,000 + Setup materials €500 + Setup equipment €1,500 = €5,000 cost pool
  • Processing activity: Processing labor €10,000 + Equipment depreciation €3,000 + Utilities €2,000 = €15,000 cost pool

Cost Drivers​

Cost driver is a factor that causes or drives the cost of an activity. It is the measure of activity consumption.

Characteristics:

  • Causes the activity cost
  • Measurable
  • Correlated with activity cost
  • Practical to track

Types of Cost Drivers:

  • Volume-Based: Number of units, hours, etc.
  • Transaction-Based: Number of setups, orders, inspections
  • Duration-Based: Time spent on activity
  • Intensity-Based: Complexity, difficulty

Identifying Cost Drivers​

Process:

  1. Understand what causes the activity
  2. Identify what drives the activity cost
  3. Choose measurable driver
  4. Verify correlation

Example: Setup Activity:

  • What causes setup? Need to change from one product to another
  • What drives cost? Number of setups (each setup takes time and resources)
  • Cost driver: Number of setups

Common Cost Drivers​

Setup Activities:

  • Number of setups
  • Setup hours
  • Number of changeovers

Processing Activities:

  • Machine hours
  • Direct labor hours
  • Number of units processed

Inspection Activities:

  • Number of inspections
  • Inspection hours
  • Number of batches inspected

Ordering Activities:

  • Number of purchase orders
  • Number of suppliers
  • Number of orders placed

Packaging Activities:

  • Number of packages
  • Packaging hours
  • Number of units packaged

Selecting Cost Drivers​

Criteria:

  • Causal Relationship: Driver should cause the cost
  • Measurability: Easy to measure
  • Cost-Effectiveness: Cost to track should be reasonable
  • Accuracy: Should provide accurate allocation

Example: For setup activity:

  • Good driver: Number of setups (causes cost, measurable)
  • Poor driver: Number of units (doesn't cause setup cost)

Cost Driver Rates​

Formula: Cost Driver Rate = Total Activity Cost ÷ Total Cost Driver Volume

Example:

  • Setup cost pool: €5,000
  • Number of setups: 100
  • Setup rate: €5,000 ÷ 100 = €50 per setup

Multiple Cost Drivers​

Some activities may have multiple cost drivers if costs are driven by different factors.

Example: Inspection activity:

  • Basic inspection: €2,000, driven by number of inspections
  • Complex inspection: €1,000, driven by inspection hours
  • Total: €3,000

Two Rates:

  • Basic: €2,000 ÷ 200 = €10 per inspection
  • Complex: €1,000 ÷ 50 = €20 per inspection hour

Luxembourg Compliance Note​

In Luxembourg:

  • Cost pools should be logical and reasonable
  • Cost drivers should reflect actual consumption
  • Should be measurable and trackable
  • Consider cost of tracking vs. benefit
  • Use PCN accounts to support cost pools
  • Maintain proper cost records

Think It Through​

How do you identify appropriate cost drivers for activities? What makes a good cost driver?