Cost Object – Definition
A cost object is anything for which a separate measurement of costs is desired. In other words, a cost object is a service unit for which we want to know the cost.
Examples are a product, service, project, client, brand category, activity, and department. Whether management focuses on costs for goods or manufacturing departments, manufacturing departments are either cost pools or objects.
The concept of cost objects is more comprehensive. It also includes a group of products, services, departments, customers and 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, any 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 or the finance department, accounting department, or product lines? Why are we even thinking about these things?
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.
We can think, “Okay, wait a minute. We’re charging X amount for this item (for this sleeping bag), but it’s costing us more to produce it. So we either need to discontinue this product line or raise the price.” Assigning a cost to these cost objects can help us make that kind of decision, and it can also help us control our costs.
When we think about control in the context of cost accounting, we are basically guessing, “We’ve got this marketing department, we’ve got this accounting department, and these different departments have budgets. We want to control their spending in the sense that we want to make sure that it doesn’t exceed a certain threshold.”