Definition of Cost Object in Cost Accounting

A cost object is anything for which a separate measurement of costs is desired. It may be a project, a customer, an activity or a department.

The concept of cost objects is more comprehensive. It also includes a group of products, services, departments, customers suppliers and so on. Any item to which cost can be traced and has a crucial role in the management strategy can be treated as a cost object.

Second Explanation of Cost Object

A cost object is any product, a job order, a division, and anything to which you can assign a cost. This is a comprehensive definition of cost objects, so let me give you some concrete examples to handle this better. Let’s say that a firm has multiple product lines.

For example, you have product line #1 that makes tents. Then, product line #2 makes hiking packs, and product line #3 makes sleeping bags. Each of these product lines can be assigned costs, so they are cost objects. But it doesn’t just have to be a product or product line that we are thinking about assigning costs. We can also assign costs to customers.

We can say, “How much does each customer we have (customer #1, 2, 3, and so on), how many resources do they take up of ours? Do they call or email us? How much SG&A do we spend on these different customers?” Maybe one particular customer returns an abnormally high number of items, so we can start assigning some costs to those customers.

So we can say this specific customer (customer #1) is costing us a lot more to serve than customer #2. So, the customers themselves can be cost objects. We can also think about the departments within the organisation. So you have the marketing department, finance department, accounting department, etc.

These departments may all be costed. Departments may be cost items. A cost object may be anything. It’s irrelevant. What matters is that you’ve identified a cost object to which you’d want to apply a cost.

So why are we assigning cost objects in the first place? Why do we care about the costs for the marketing department finance department, accounting department, or product lines? Why are we even thinking about these things?

Using Cost Object in Decision-Making

One crucial thing we want to do is monitor our firm’s profitability. “How does this tent product line compare to the sleeping bag product line in terms of profit margins?” We don’t know how profitable each product line is until we assign costs to these cost objects.

Now that we’ve monitored the profitability of each product line or department, we can assess the managers’ performance. Asking, “Is it the finance manager or the sleeping bag product line manager? Are they doing well?” We can monitor their expenditures. Are there any unforeseen costs? Maybe they overspend. So we may think about those things and utilise the costs we assign to cost objects to assist us price.

Conclusion

Identifying cost objects is essential for accurate cost analysis and informed decision-making. A cost object is anything to which costs are assigned, such as products, services, projects, departments, customers, or geographic regions. By understanding your management needs and cost drivers, you can effectively identify measurable entities that provide valuable insights. Common cost objects include individual products, specific services, unique projects, functional departments, customer segments, and sales territories.