Cost pools for tech level..

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:28AM in AAT student discussion
Hi<BR><BR>Can anyone explain to me in the most simplest terms what is meant by a cost pool and a cost driver? I cannot get my head around them. Thanks.

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Cost pools for tech level..

    These derive from ABC, Activity Based Costing. You can think of this as 'son of absorption costing'.<BR><BR>Activity uses resources and incurs costs, whether they be direct or indirect. As an example, consider the purchasing department in a large factory. They order stuff for the factory to process and sell, this causes costs like wages, rent, H & L, stationery, computer resources etc. If we collect all those costs together , they form a cost pool. We then ask what drives us to incur the costs and this is the activity 'ordering'. We call the individual order a 'cost driver'.<BR>At the start of a period a budget of costs and activity would be drawn up and the budget cost per driver calculated. This figure is used to allocate costs in the accounts system. <BR>Note that this is still a system of absorption but is considered more accurate than the traditional system using machine hours etc.

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