Cost Pools

COST POOLS 6

CostPools

CostPools

Inmanagerial accounting, thegrouping of individualvaluesis calledcostpool.Itiscommonlydonein a serviceordepartmentcenter.Costpoolsarenecessitatedby theobligationof trackingexpensesfora particularprojectordepartment.Thethoughtis to associateparticulardirectorindirectexpenditurewith an appropriatecostdriver.Therefore,thewholeprocessis clearandeasyto determinethetotalof theexpensescommittedto thecompletionof a projectorallocatedfortheoperationof a givendepartment.Costdriversare necessarybecause,a companymust havean appropriateunderstandingof thecorrelationbetween expensesincurredandtheactivitiesthat causethem. Thisanalysisprovidesthepremiseforcostallocation among thebusinessunitsthat directlybenefitfrom theexpenseincurred,howeverthecostobjectiscommonlyknownas costat issue.

Avalueobjectmay appearconnectedto variousactivitiesthereforein determiningcostdriversa companymust be specificto thosethat correlatesignificantly with thecostobject.Thiswill bestfacilitatetraceablemanagementcontrolequallythat are theeasiestforcostmeasurement.In an activity-based costing (ABC), presumptionthattheprocessto manufacturea productorprovidesa serviceare whatdeterminetheoverheadexpensesincurred.Everyoverheadexpensebe itfixed,orvariable isassignedto a particularcategoryof cost.Thesecostcategoriesarecommonlyknownas activitycostpools.Costdriversare theactualeventsthat trigger thetotalexpensein an activitycostpoolto rise.Whentheproductionin a manufacturingcompanyincreases,therawmaterialsincludingthepersonnelalsorequiredincrease.In addition,thenumberof clientsaccessinga companyserviceconsequently increasetheexpensesincurredto providetheservice.Theseare examplesof activitiesthat affectthecostsa businessincurs.In utilizingABC, to establishthecostper unit,thetotalexpenseof everyactivitypoolis apportionedby thetotalnumberof unitsof theactivity(Hart et al., 2012, p. 487).

Acaseexampleis wherewehavea companycalledNexus, andithas pinpointed its activitycostpoolsandcostdrivers.Activitypoolone is thepurchasingdepartmentwith activitycostdriversbeingnumberof purchaseorders.Activitypooltwo is thereceivingunitwith activitycostdriversbeingnumberof purchaseorders.In theactivitypoolthree, wehavematerialshandlingwith activitycostdriversbeingnumberof materialsrequisitions.Thefourth activitypoolsetupwith activitycostdriversbeingnumberof machineconfigurationsneeded.Thefifth activitypoolis inspection-having numberof inspectionas theactivitycostdrivers.Engineeringdepartmentis numbersix with numberof engineeringchangeordersas theactivitycostdrivers.Thepersonnelprocessing is theseventh activitypoolwith thenumberof employeeshiredorfiredas theactivitycostdrivers.Lastly,supervisorsare theeighth activitypoolshavingnumberof directlaborhoursas theactivitycostdriver.In theactivity-based costing method,Nexus will assignoverheadexpensesin a clear,logicalmannerthan non-ABC approach,which justallocatescostsbased on theemployees`hours.Nexus has establishedthatthepurchasingandreceivingdepartments`expensesarecausedby thenumberof purchaseorders.Consequently, thetwo departments`costsare addedtogetherto arriveat one per unitcostwhich iscalculatedforthesedepartments.Herecostsareallocatedto theactivitiesthat are thecauseof theoverheadexpense.

ThecostanalysisforNexus supposesthatthecompanywantsto expandto anothercityfrom Detroit whereitisbased.Theinitialstepis to conducta cost-benefit studyto establishwhetherthenewmanufacturingplantis profitableornot. Thesecondstepis to itemizethedirectcostof theintendedexpansionlike thecostof labour,personnel,rawmaterialsandmanymore.Thisstepmust tackleeverydirectcost.Itemizinganyindirectcostsis thethirdstep,howeverthesecostsare intangiblemeaningthattheycannot be be soldorbought.Nexus must audittheenergyspentby keystaffto setup thenewmanufacturingcompany,costof trainingotherstaffto reachthelevel of thetransferredones.Thecostof disruptionto thestaffroutineperhapslike movingto a newcityincludingpossibleresignationby someemployeeson accountof transfersto workin anothertown.Thefourth stepis to itemizetheprojectedbenefitstheseare themoneysaved.Forinstance,thenewplantwill servea particularlocationandenviron, hence,thecostof movingproductsto theconsumer.

Therefore,incomeproducedas newrevenuestreamsareopened.In thefifth step,Nexus must addup andcomparethenewbranchcostandbenefitsthat will eithermaketheventureproductivein a financialsenseornot. Thesixth stepis to calculatea recouptimefortheinvestment.Thelengthof timeto recovertheinitialinvestmentmust be estimatedto establishthestartof profitgeneration.Theseventh stepis to establishifthenewfactoryis a surethingmeaningthattheprojectedbenefitsof thenewplantcompletelyoutweighsthecostof theproject.Theinvestedmoneycan berecoveredin a reasonabletime.Therefore,thistranslatesto implementingphasebutifnot thewholethingmust bereconsidered.

Theadvantageof usingtheABC methodis theclarityitbringsto theaccounting managerial systemin a company.Hereweare actualizingthelogical,precisemannerthefinancialprocessisdone.Thetracking andlinking of costfrom thecausein theactivitycostdriversto an activitypool.Whena companyiscomplicated,thismethodmakeseverything clear.Thesetranslate to a moreinformeddecisionmadeby businessmanagersto betterruntheir companies.TheABC methodalsoshowstheexactcompanyfinancialstatus.Manyunaccounted costsaremetin a businessthat doesnot usetheABC method.Theallocation of overheadcostsisnot appropriatelydone.Consequently, theirs are somanycoststhat are untraceable. In ABC, therealcauseis known,tracedthenmet.

References

Hart,J., Wilson, C., &amp Fergus, C. (2012). ManagementAccounting: Principles &amp Applications. Pearson Higher Education AU.