Cost pools are groups of expenses related to a specific product or service. They help track expenses for projects or departments and simplify accounting tasks by associating expenses with a particular project. Cost pools can be used to track any set of expenses and are assigned a specific number sequence.
Also known as cost centers, cost pools are groups of associated costs that all relate to a specific product or service in some way. Many companies and higher education institutions use cost pooling to track expenses related to a specific project or department. The idea behind the pool is to associate direct and indirect costs with a given cost driver, making it much easier to determine the total amount of expenses involved with running the department or completing a given project.
While the exact structure of a cost pool varies, most organizations prefer to create number sequences that can then be assigned to a specific project. Often, the single cost group will have up to ten digits in the sequence, with some groups of those digits used to tie back to the project. For example, the first four digits of the cost pool can identify a specific department that is working on the project, while the next two digits identify the project itself. The last four digits would refer to a specific subset of expenses associated with the project, such as communication costs.
Creating a cost pool allows you to quickly associate an expense with the correct department and project. For this reason, it is not unusual for a corporate customer to provide a supplier with a specific cost center or pool number that references the invoice for the goods or services provided. The sequence of characters that make up the pool provides the accounting department with the information it needs to charge the correct line item within the accounting records.
A cost pool can be used to track any desired set of expenses. For example, a national sales manager could assign cost centers or pools to each of the sales territories under her jurisdiction, making it possible to split the divisional expenses by geographic area. Cost pools can also be used to identify specific groups of expenses related to an individual project, making it possible to readily identify how much was spent on office supplies, what was spent on telecommunications needs such as teleconferencing, and how much of the project budget was spent conducting consumer surveys.
When used well, a cost pool greatly simplifies the accounting task. The string of characters makes it easy to associate various expenses with a particular project, without having to spend a lot of time researching how to apply the charge. As long as the accounting department knows which center has been assigned to which department or project, expenses can be applied quickly and efficiently.
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