Definition: An activity cost pool is a temporary account that is used to total the costs incurred for a specific group of activities. In other words, it’s a way to record the cumulative costs of a group of similar activities. Even though the cost pool account is similar to the factory overhead account it actually contains both fixed and variable costs. The fixed coststypically include equipment purchases; whereas, the variable costs include material and supply purchases.
What Does Activity Cost Pool Mean?
Activity cost pools are used in the managerial accounting method of activity-based costing to assigned costs to products based on their activities and production processes.
During the activity based costing process, cost accountants use activity cost pools to accumulate and total all of the costs for a specific activity. Once all of the costs have been sorted and totaled in pools, an overhead rate can be computed for the activities and eventually assigned to the products or objects based on their activity cost drivers.
Let’s take a look at an example.
Lynn’s manufacturing plant has several different departments that make vary different products. One department manufactures sunglasses and uses activity based costing to help allocate the overhead. The sunglasses department’s operations can be divided up into three main pools: design, molding, and assembly. The total costs for the department are $50,000.
Using the activity cost pools, Lynn comes up with the following cost drivers: factory square footage used, maintenance hours, machine hours, labor hours, and number of units produced. Lynn can analyze these three different pools in relation to the cost drivers and allocate the $50,000 total costs appropriately between the three pools.
As you can see, this method of assigning costs is far more accurate and helpful than estimating expenses or splitting the total costs equally amongst all three pools. Some drivers, like machine hours, don’t apply to all the pools.