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What is a Cost Pool?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Also known as cost centers, cost pools are groups of associated costs that all relate to a specific product or service in some manner. Many businesses as well as institutions of higher learning make use of the cost pool to track expenses related to a specific project or department. The idea behind the pool is to associate direct and indirect costs with a particular cost driver, making it much easier to determine the total amount of expenses involved with the operation of the department, or the completion of a given project.

While the exact structure of a cost pool varies, most organizations prefer to create numerical sequences that can then be assigned to a specific project. Often, the individual cost pool will have up to ten digits in the sequence, with certain groups of those digits used to relate back to the project. For example, the first four digits of the cost pool may identify a specific department that is working on the project, while the next two identify the project itself. The final four digits would related to a specific sub-group of expenses associated with the project, such as communication costs.

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The creation of a cost pool makes it possible to quickly associate an expense with the right department and project. For this reason, it is not unusual for a business customer to provide a supplier with a specific cost center or pool number to reference on the invoice for the goods or services provided. The sequence of characters that make up the pool provide the accounting department with the information necessary to charge the costs back to the right line item within the accounting records.

A cost pool can be used to track any set of expenses desired. For example, a national sales director could assign cost centers or pools to each of the sales regions under his or her jurisdiction, making it possible to break down division expenses based on geographical area. Cost pools can also be used to identify specific groups of expenses related to a single project, making it possible to readily identify how much was spent on clerical supplies, what was spent on telecommunications needs like conference calls, and how much of the project budget was spent on conducting consumer surveys.

When used to best advantage, a cost pool greatly simplifies the accounting task. The sequence of characters makes it easy to associate various expenses with a given project, without the need to spend a lot of time researching how to apply the charge. As long as the accounting department knows what center has been assigned to which department or project, it is possible to apply the charges quickly and efficiently.

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Clairdelune
Post 3

My brother-in-law works for a big company. He is always talking about how the cost pool system works so well in his company. I think he said that for each project his department works on, there are ten number sets. Certain numbers tell him what the name of the project is, the department, and information about the costs.

The accounting department likes this process too, because they can tell how much to charge which project with.

live2shop
Post 2

I imagine that the retail business really uses the cost pool system in their operation. There are so many areas where they need to coordinate budget matters. There are so many divisions that need a simple way of accounting. The ten-digit code gives budget information in a short time. I wonder how these big companies ever managed efficiently before this system was started.

summing
Post 1

Great overview! I'd just like to add that what with business being so expansive and interrelated these days that advanced logistical measures like these have to be put in to place. Costs pools allow business to operate on a scale and with a level of efficiency that would not be possible otherwise -- I learned this the hard way in my own small business!

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