Homogeneous cost pool definition
/What is a Homogeneous Cost Pool?
A homogeneous cost pool is a set of costs whose changes are triggered by a single cost driver. A cost driver is the reason why a cost occurs. For example, in the accounting department, the number of supplier invoices handled is a cost driver, because the number of invoices that must be processed is the reason why the accounts payable staff is paid. Stated differently, a homogenous cost pool is a cluster of costs that exhibit a similar cause and effect.
A homogeneous cost pool typically contains a set of similar costs. To continue with the example, a cost pool whose changes are triggered by the number of supplier invoices will likely contain the hourly wages of the payables staff, their benefit costs, and any office supplies and utilities associated with their presence. Thus, if the number of supplier invoices received were to increase, so too would these expenses, since more staff would be needed to handle the additional level of activity.
Example of a Homogeneous Cost Pool
As an example of a homogeneous cost pool, a cost accountant creates a machine-related cost pool. It contains the following costs:
Machinery depreciation. The cost of wear and tear or aging of the machines.
Machinery maintenance costs. The expenses incurred to keep the machines in good working condition.
Energy costs. The electricity or fuel used to operate the machines.
Machinery setup costs. The costs incurred to set up machines for production runs.
Machinery-related supplies. The cost of consumables, such as lubricants, spare parts, or other items specific to machinery operations.
These costs are considered homogeneous because they all relate to the operation and maintenance of machinery. The cost driver for this pool might be machine hours or units of production, depending on how the machines' usage is measured.
The Optimal Number of Homogenous Cost Pools
If there are a large number of cost drivers in a business, then there will likely be a large number of homogeneous cost pools associated with them. However, it can require a great deal of labor to determine the contents of these cost pools and then maintain them over time. Consequently, it is more common to reduce the number of cost pools, even though this may mean that their contents are not perfectly homogenous. This is less of an issue for smaller activity-based costing projects, where only a small number of costs are being examined, and so a higher level of accuracy can be used in constructing a small number of cost pools.