From the course: Activity-Based Costing
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Understanding cost pools
- Let's not treat all overheads the same. Why? Because they're not. In traditional accounting overheads are generally considered to be fixed costs. That is costs that don't vary with changing production volumes. Now whilst this may hold truth for some overheads such as say a building lease or equipment maintenance, the same can't be said for other costs such as IT, customer care, and the like. By understanding this type of work a little further, we can more accurately assign overhead costs to the products and services that rely on them, and this is achieved through what's called a Cost Pool Analysis. A Cost Pool Analysis is where we essentially split our overheads into kind of groups. Groups of costs that are likely to be influenced by the same activities or drivers. Take for example a government agency that oversees transport registration. Now to keep things simple, let's assume that this agency looks after the registration of just four transportation groups: motor vehicles…
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