ACCA Performance Management (F5) Certification Practice Exam

What best defines a cost pool in the context of ABC?

1. A collection of production labor costs

2. A collection of overhead costs associated with specific activities

3. A general fund for unexpected expenses

4. A budget allocated for marketing and sales

The correct answer is: A collection of overhead costs associated with specific activities

A cost pool in the context of Activity-Based Costing (ABC) refers to a collection of overhead costs that are grouped together based on specific activities performed in the production process. In ABC, costs are allocated to products or services based on the actual consumption of resources associated with each activity. This method helps in identifying more accurately the costs incurred for specific activities, allowing for better pricing, budgeting, and overall cost management. The correct choice reflects this principle by emphasizing that the costs within a cost pool are tied to particular activities that drive overhead expenses. This is essential in ABC since it focuses on understanding how costs are incurred and the relationship between activities and costs, leading to more precise costing and decision-making. In contrast, other options do not align with the ABC methodology. For instance, simply cumulatively counting production labor costs doesn't take into account the diverse overhead activities involved. Similarly, a fund for unexpected expenses or a budget for marketing and sales do not pertain to the operational activities that ABC seeks to analyze and allocate costs to for improving cost efficiency and profitability.