Determining cost pools

A homogeneous cost pool is one in which all the activities whose costs are included in the pool

have the same or a similar cause-and-efect relationship or benefits-received relationship between

the cost allocator and the costs of the activity. Why is homogeneity important? Because using

homogeneous indirect-cost pools enables more accurate product, service and customer costs to

be obtained. A consequence of using a homogeneous cost pool is that the cost allocations using

that pool will be the same as would be made if costs of each individual activity in that pool were

allocated separately. The greater the degree of homogeneity, the fewer cost pools required to

explain accurately the diferences in how products use resources of the organisation.

Assume that Fontaine Informatique wishes to use the cause-and-efect criterion (that is, identify

the variable or variables that cause resources to be consumed) to guide cost-allocation decisions. The

company should aggregate only those cost pools that have the same cause-and-efect relationship

to the cost object. For example, if the number of employees in a division is the cause for incurring both

corporate Payroll Department costs and corporate Personnel Department costs, the payroll cost pool

and the personnel cost pool could be aggregated before determining the combined payroll and

personnel cost rate per unit of the allocation base. That is, the combined rate per unit of the allo-

cation base is the same as the sum of the rates if the individual cost pools were allocated separately.

A variety of factors may prompt managers to consider recognising multiple cost pools where

a single cost pool is currently being used. One factor is the views of line managers and personnel.

For example, do they believe important diferences exist in how costs are driven or how products

use the facilities not currently being recognised using a single cost pool? A second factor is changes

made in plant layout, general operations and so on, such that all products do not use the facility

in an equivalent way. A third factor is changes in the diversity of products (or services) produced

or in the way those products use the resources in the cost pool. Improvements in information and

communication technology continuously expand the ability to develop multiple cost pools.