After being recorded in the general ledger and subledger accounts, costs are accumulated in activity center cost pools. An activity center is a segment of the production or service process for which management wants a separate report of the costs of activities performed. In defining these centers, management should consider the following issues: geographical proximity of equipment, defined centers of managerial responsibility, magnitude of product costs, and a need to keep the number of activity centers manageable. Costs having the same driver are accumulated in pools reflecting the appropriate level of cost incurrence (unit, batch, or product/process). The fact that a relationship exists between a cost pool and a cost driver indicates that, if the cost driver can be reduced or eliminated, the related cost should also be reduced or eliminated.
Gathering costs in pools reflecting the same cost drivers allows managers to recognize cross-functional activities in an organization. In the past, some companies may have accumulated overhead in smaller-than-plantwide pools, but this accumulation was typically performed on a department-by-department basis. Thus, the process reflected a vertical-function approach to cost accumulation. But production and service activities are horizontal by nature. A product or service flows through an organization, affecting numerous departments as it goes. Using a cost driver approach to develop cost pools allows managers to more clearly focus on the various cost impacts created in making a product or performing a service than
was possible traditionally.
Gathering costs in pools reflecting the same cost drivers allows managers to recognize cross-functional activities in an organization. In the past, some companies may have accumulated overhead in smaller-than-plantwide pools, but this accumulation was typically performed on a department-by-department basis. Thus, the process reflected a vertical-function approach to cost accumulation. But production and service activities are horizontal by nature. A product or service flows through an organization, affecting numerous departments as it goes. Using a cost driver approach to develop cost pools allows managers to more clearly focus on the various cost impacts created in making a product or performing a service than
was possible traditionally.