A cost pool is a collection of costs that are driven by a major cost driver. In this section, we will use established company departments as cost pools.

Your research has identified that Yore Company has two main departments in the production facility: assembly, which is done by machine, and finishing, which is done by hand and is therefore labor-intensive.

The cost breakdown is as follows:

Therefore, using departments to collect costs, this production process has two cost pools: assembly and finishing.

Let’s say that the production manager for the assembly department and the production manager for the finishing department are trying to decide between using machine hours as a base or using labor hours as a base. The assembly department is driven by machine hours, as it is heavily automated. However, the finishing department is driven by labor hours, since it is detailed work done by hand.

Working with the financial accountants, the managerial accountants then capture fixed manufacturing overhead by cost pool (department) so that it can be allocated by different methods. We’ll allocate the costs associated with assembling the purses by machine-hours, and we’ll allocate the costs of finishing the purses according to labor.

Before we calculate the allocations by department, let’s review your understanding of cost pools and cost drivers.