Compare and Apply Analysis Centers and Cost Pools

To build a high-performance management accounting model for a company, it is essential to differentiate between Cost Pools and Analysis Centers. Although they are both used for cost tracking and allocation, they have distinct objectives and structures.

Indeed, they both play similar roles in cost allocation and therefore in constructing Full Costs within companies, but they actually offer complementary perspectives on how costs are grouped, attributed, and controlled.

Cost Pools

Cost Pools are groupings of related indirect costs. Their main advantage lies in their ability to group similar costs for better allocation and management. Cost Pools are often used to allocate costs that cannot be directly attributed to a specific product or service. For example, equipment maintenance costs, support staff salaries, or general production overheads.

Analysis Centers

Analysis Centers, on the other hand, are specific divisions or departments within the organization where costs are incurred. Each Analysis Center is responsible for its own expenses and budget management. Analysis Centers allow better attribution of direct and indirect costs to specific segments of the business, thus facilitating expense control and financial performance analysis by sector.

Cost Pools

• Manufacturing Industry: In this sector, machine maintenance costs, production overheads, and support costs are grouped into Cost Pools. This allows an equitable allocation of costs among different products manufactured, based on resource usage.
• Healthcare: Hospitals and clinics use Cost Pools to group indirect costs related to medical equipment maintenance, administrative costs, and support services. For instance, equipment sterilization costs are allocated to different departments based on their usage.
• IT: IT companies create Cost Pools to group server maintenance costs, network fees, and technical support costs. This helps allocate these costs among different projects or departments based on their usage of IT resources.

Analysis Centers

• Service Organizations: Service companies, such as consulting firms, marketing agencies, and law firms, use Analysis Centers for each department or team. For example, a consulting firm may have separate Analysis Centers for strategic consulting, technology consulting, and management consulting teams.
• Public Sector: Government institutions and nonprofit organizations use Analysis Centers to control and manage expenses by department or program. For instance, a municipality may have Analysis Centers for public works, parks and recreation, and transportation services.
• Retail: Retail chains use Analysis Centers for each store or department within stores, which is highly relevant for detailed financial performance analysis and precise budget management. For instance, a supermarket chain may have distinct Analysis Centers for fresh produce, packaged goods, and customer services departments.

1. Group Indirect Costs

Indirect costs are first grouped into Cost Pools. For example, equipment maintenance costs, administrative costs, and support costs are grouped into distinct pools based on their nature.

2. Allocate to Analysis Centers

Cost Pools are then allocated to different Analysis Centers based on predefined allocation criteria, such as resource usage rates or specific consumption metrics. Each Analysis Center thus receives a share of indirect costs, in addition to its own direct costs.

3. Allocate to Products and Services

Once Analysis Centers have received their share of Cost Pools, these costs are then allocated to specific products or services based on their consumption of Analysis Center resources. For example, indirect costs allocated to the production Analysis Center are then distributed among different products manufactured based on their use of equipment and labor.