What is a Homogeneous Cost Pool?

//What is a Homogeneous Cost Pool?
What is a Homogeneous Cost Pool? 2017-10-04T23:05:52+00:00

Definition: Managerial or cost accountants keep track of and evaluate business costs to help manage and budget a company’s operations. One way of keeping track of costs is to divide them up into cost pools or groups. For example, a manufacturer might group all machining costs together into one cost pool.

What Does Homogeneous Cost Pool Mean?

Homogeneous cost pool is a managerial accounting term for group of costs that have the same cause and effect or benefits received relationship with the cost allocation base. The more homogeneous or similar the cost pools are the more costs can be attributed to the cost object. This sounds pretty complicated doesn’t it? Well, it’s actually pretty simple.

Example

A cost allocation base is way costs get assigned to a cost pool. For instance, machine maintenance costs might get assigned based on machining hours. The more hours a machine runs, the more estimated maintenance costs gets assigned to the machine cost pool.

Cause and effect relationship looks at what causes resources to be used or consumed. Assume that hours spent in quality control is a cost allocation base. If a manufacturer produced a highly technical product, it would have to spend more time inspecting its products to insure they are free of defects. Quality control causes the cost allocation base to increase.

Benefits received relationship has to with what departments actually get a benefit from the allocation base. Take advertising expenses as an example. Advertising can benefit products and departments differently. It wouldn’t make sense to distribute advertising expenses evenly to all departments.

Homogeneous cost pools group similar cost pools together based on similar cost allocation bases in order to help with financial forecasting and budgeting. An example could be administrative costs and human resource costs between departments. These two pools could use number of employees as the cost allocation base. If the cause and effect relationship is similar, management can pool these costs for budgeting purposes.