What is an 'Activity Cost Pool'

An activity cost pool is an aggregate of all the costs associated with performing a particular business task, such as making a particular product. By pooling all costs incurred in a particular task, it is simpler get an accurate estimate of the cost of that task.

BREAKING DOWN 'Activity Cost Pool'

One example of the use of activity costs is in manufacturing. A manager may be asked to evaluate production costs of each product produced by a factory. Activity-based costing (ABC) is a common method for determining those production costs. ABC defines production as consisting of a variety of activities, and it assigns costs to those activities. For example, machine set-up might be one activity associated with the production of a particular product. The cost of set-up would be one cost included in an activity cost pool. Purchasing materials might be another cost assigned to the pool. Assigning costs accurately is important to determine the profitability of products and subsequently to make rational production decisions.

Activity-Based Costing vs. Traditional Methods

ABC differs from traditional costing methods. Traditional costing is product-based and period-based. Product-based costs include materials, labor, and overhead while period-based costs include sales, general costs, and administration (SG&A). These are charged against revenue for each accounting period. Allocating these costs to the production of products can produce distorted estimates, according to some managers, especially if a factory produces many different products. For a company with a single product, however, traditional costing and ABC would produce similar product cost estimates.

The advantage of ABC is that it ties activity costs more directly to production. It achieves this by removing the distinction between product and period-based costs. In addition, under ABC, products are not allocated costs of unused capacity. Under traditional costing methods, some portion of purchasing costs might be assigned to a product regardless of how much actual purchasing activity was required. ABC would seek to assess actual purchasing activity associated with a particular product. In addition, unused capacity might also be assigned to a product, potentially distorting its cost.

ABC is not used only in manufacturing businesses. It may also be applied to service businesses.

RELATED TERMS
  1. Activity-Based Costing (ABC)

    Activity-based costing is a system that tallies the costs of ...
  2. Applied Cost

    Applied cost is a term used in cost accounting to denote the ...
  3. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  4. Activity Dictionary

    Activity dictionaries are used in activity analysis and provide ...
  5. Activity-Based Management - ABM

    Activity-based management focuses on business processes and managerial ...
  6. Extended Normal Costing

    Extended normal costing is a method of tracking production costs ...
Related Articles
  1. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  2. Investing

    Disney to Slash Workforce at Struggling TV Units

    Expected 10% cuts at ABC TV are intended to help Disney compete against Netflix and Amazon.
  3. Trading

    Stock Analysis: Forecasting Revenue and Growth

    Revenue and growth projections are important components of security analysis, measuring a stock’s future worth.
  4. Investing

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  5. Personal Finance

    Can You Afford Not to Hire a Financial Advisor?

    People often worry about how much a financial advisor costs instead of what it costs not to have one.
  6. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  7. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  8. Tech

    The Number Of Dark Pools In Cryptocurrency Trading Is Increasing

    Dark pools, which conduct trades away from cryptocurrency exchanges, are increasing in crypto trading.
  9. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  10. Investing

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
RELATED FAQS
  1. What are direct costs of sales?

    Learn about direct costs of sales and cost of goods sold (COGs), what direct costs of sales measures and how to calculate ... Read Answer >>
  2. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  3. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  4. Does gross profit include labor and overhead?

    Gross profit is a company's profit after subtracting the costs of producing the goods and services. Several costs impact ... Read Answer >>
  5. What are the differences between absorption costing and variable costing?

    Examine the main differences between absorption costing and variable costing, along with the advantages and disadvantages ... Read Answer >>
  6. How do I calculate production costs in Excel?

    Find out about ways to use Excel to simplify production cost calculation and some sources of good templates and tips for ... Read Answer >>
Trading Center