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.
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.