Question

What are cost objects, cost pools and allocation bases ? What role do they play in cost allocation? What is the difference between cost allocation bases and cost drivers ?

Answer 1

A cost object is a term used primarily in cost accounting to describe something to which costs are assigned. Common examples of cost objects are: product lines, geographic territories, customers, departments or anything else for which management would like to quantify cost.

Cost pools is an accounting term that refers to groups of accounts serving to express the cost of goods and service allocatable within a business or manufacturing organization.

An allocation base is the basis on which Cost accounting allocates overhead costs. An allocation base can be a quantity, such as machine hours that are used, kilowatt hours (kWh) that are consumed, or square footage that is occupied.

The first step when allocating costs is to identify the cost objects for which the organization needs to separately estimate the associated cost. Identifying specific cost objects is important because the organization cannot allocate costs to something that is not yet known.

The cost object can be a brand, project, product line, division/department, or a branch of the company. The company should also determine the cost allocation base, which is the basis that it uses to allocate the costs to cost objects.

After identifying the cost objects, the next step is to accumulate the costs into a cost pool, pending allocation to the cost objects. When accumulating costs, you can create several categories where the costs will be pooled based on the cost allocation base used.

The difference between cost allocation bases and cost drivers is that cost drivers are allocation bases but not all allocation bases are cost drivers. Ideally allocation bases should be cost drivers; that is, there should be a cause and effect relationship between the costs in the cost pool andthe allocation base.