Cost Object: Definition, Types, Examples & Benefits

Cost Object: Definition, Types, Examples & Benefits
Cost Object: Definition, Types, Examples & Benefits

The concept of cost object is more voluminous.  It also includes a group of products, services, departments, customers and suppliers, and so on.  Any item to which a value can be traced and which plays a critical role in management strategy can be considered a cost object.

A cost object is anything that requires a separate cost measurement.  In other words, a cost object is a unit of service whose cost we want to know.

What Is Cost Object?

A cost object is a management term for a product, process, department, or customer to which a cost is associated.  In other words, it’s something you can identify with and track costs.

In any manufacturer’s production process, accountants and managers want to track costs back to what creates them in order to optimize operations and increase efficiency. 

These traceable costs or direct costs are costs that can be traced back to a single cost object.  Accountants can review expenses or cash outlays and find out where they were spent and why.

ALSO CHECK: COST STRUCTURE: Definition, Example & Detailed Guide.

How Does It Work?

A cost object may be subject to significant ongoing review, but more often a company will accumulate costs for it only occasionally to see if there have been any significant changes since the last analysis. 

This is because most accounting systems are not designed to accumulate costs against specific cost objects and therefore need to be reconfigured to do so on a project-by-project basis. 

An annual review is common to many cost objects.  If the analysis is particularly complex, the check may continue at an even longer interval.

It may be necessary to have a cost object to derive a price from a cost base, or to see if the costs are reasonable, or to get the full value of the relationship with another organization.

ALSO CHECK: WHAT IS STANDARD COSTING? Definition and Advantages

Cost Object Example

For example, a product or service offered by a company is a cost object.  And if a company wants to calculate the cost of a project or department, then the project, client or department becomes a cost object. 

When a company determines the cost of a project or department, it can assign that cost to the final product or service to get the total cost.

For example, if the sales department is a cost object, then several costs are tracked to that department. 

These costs include salaries of sales staff, rent of sales space, costs of office supplies, marketing costs, etc.  The company can then use these costs to set the price of the final product.

ALSO CHECK: COST CONTROL: Definition, Methods, and Project Management Software

What Are The Types Of Cost Object?

Output

The product or service offered by the company refers to this.  These are the most common types of cost objects because a company would like to know the cost of its products in order to set a price.

Operational

Operating cost objects include objects within the company for which the company would like to determine a cost.  It can be a process, a machine, a department, a group of employees, etc.

Business relationship

It includes entities that are external to the company and for which the company would like to find a value—for example, the value of a supplier, a customer, or the cost of renewing a license, etc.

ALSO CHECK: What Is Prime Cost: Formula and How To Calculate It

What Are The Uses And Benefits?

  • Such objects help the company find the money it spends on that object.
  • They help determine the profitability and price of a product or service.
  • It also helps the company in cost management and control.
  • They also assist in the preparation of annual reports.
  • Measuring costs by cost object at regular intervals can help a company track and compare performance over time.
  • They can help make better business decisions, for example, when submitting tender, allocating budgets between departments, etc.

What Are The Disadvantages?

  • Due to market fluctuations, sometimes the cost may be increased and the profit rate may be decreased.
  • Costs related to the cost object drawing should also be included in the operating costs, hence the total costs may be increased.
  • Experienced personnel are involved here, and time costs are greater.
  • Difficulties in sharing joint costs.

ALSO CHECK: INDIRECT LABOR: Definition, Examples and Costs

What Is Cost Object In Budgeting?

In budgeting, it is very useful because the price of products fluctuates depending on the market situation.  Therefore, large organizations prepare budgets in such a way as to draw a line between profit and expenses. 

Budgeting allows you to effectively manage costs.  The budget also has a reserve for price fluctuations.  For example, an event organization prepares a budget for each type of event so that optimal use of resources can be achieved and profits can be maximized.

ALSO CHECK: COST BENEFIT PRINCIPLE: Definition, Examples & How It Works

Why Is It Useful and Important?

Determining and assigning accurate costing to cost objects is the foundation of budget planning and should be accompanied by a review of actual historical costs for the same cost objects. 

This will help in planning accuracy.  It also supports the preparation of financial statement reports, identification of affected accounts and reported figures.

Remember that an expense object is not the same as an account in an organization’s chart of accounts.  Each account is a placeholder for a financial transaction category, such as an expense category account for raw materials.  Transactions are entered into these accounts as debits or credits.

Examples: XYZ Company manufactures a line of 10-speed bicycles that are a cost object in its product line.  This product line is the cost object for all direct materials, direct labor, and overhead.

What Cost Is Easily Traceable To A Cost Object?

Costs can be classified as direct costs or indirect costs.  The purpose of this classification is to assign costs to cost objects. 

This means any item about which cost information is collected.  Some examples of cost objects are products, departments, customers, plant, territory, product line, enterprise R&D, etc.

A cost that is easily traceable to a specific cost object is called a direct cost.  The use of the term “direct costs” is not limited to direct materials and direct labor. 

Any cost that can be easily and conveniently traced back to a specific product, customer, branch, plant, or any other cost object is a direct cost.

Conclusion

It may be necessary to have a cost object to derive a price from a cost base, or to see if the costs are reasonable, or to get the full value of the relationship with another organization.  Typically, a company focuses on a cost object only occasionally to see if there have been significant changes since the last analysis. 

Of course, a cost object can be subject to significant ongoing scrutiny if warranted.  An annual review is common to many cost objects.  If the analysis is particularly complex, the check may continue at an even longer interval.

Cost Object FAQs

What Is The Difference Between Cost Object And Cost Driver?

A cost object deals with the total cost of a product or service, while a cost driver deals with the amount of resources consumed by a business.  A cost object is more accounting and budgeting, while a cost driver is more management.

How Do Indirect Costs Work?

Costs that are not easily traceable to a specific cost object are called indirect costs.  For example, a garment factory produces different types of fabric.  A manager’s salary would be an indirect cost because it is caused by all the variables and it is not easy to track a specific variable.  Rafhan Maize Products produces a large amount of products, processing tons of maize every year.  The salary of the factory manager is an indirect product cost because it is not determined by a specific product.

How Do Direct Or Traceable Costs Work?

Direct or traceable costs of departments can be determined using primary documents and accounting records.  How much of the company do head office expenses should be allocated to different departments?  Since the managing director’s salary and other head office costs benefit all three operating departments, these costs should be allocated to all three departments.  These indirect costs can only be allocated to different production departments by allocation using a specific formula or basis, which may not be 100% accurate and reliable.

References

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