In ABC, which description best defines a cost pool?

In ABC, which description best defines a cost pool?

• A. A budget line item for marketing
• B. A unit of product
• C. Pooling of overhead costs that relate to a specific activity
• D. A production machine

Answer: (C)

A cost pool is a collection of overhead costs that relate to a specific activity, gathered together so they can be allocated to products or services based on how much that activity is used. In activity-based costing, each pool corresponds to an activity such as setup, inspection, or machine processing, and has its own driver (like number of setups or hours of inspection) to apportion costs accurately. This makes overhead allocation reflect actual consumption rather than applying a single rate to all products. For example, all costs tied to setups—staff time, equipment depreciation, and supplies—form a setup cost pool and are allocated to products according to how many setups they require. The other options describe items that aren’t pools of overhead costs and don’t capture how ABC groups costs by activity.

A cost pool is a collection of overhead costs that relate to a specific activity, gathered together so they can be allocated to products or services based on how much that activity is used. In activity-based costing, each pool corresponds to an activity such as setup, inspection, or machine processing, and has its own driver (like number of setups or hours of inspection) to apportion costs accurately. This makes overhead allocation reflect actual consumption rather than applying a single rate to all products. For example, all costs tied to setups—staff time, equipment depreciation, and supplies—form a setup cost pool and are allocated to products according to how many setups they require. The other options describe items that aren’t pools of overhead costs and don’t capture how ABC groups costs by activity.