What's the difference between Cost Driver, Cost Object, Cost Unit, Cost Center and Cost Account?
Cost driver is the quantity of resources consumed by an entity as a direct cause of the total cost incurred. For example, an electricity bill is based on the amount of electricity units consumed in the particular period. Cost driver management increases the efficiency of an organization.
A cost object is any element of a business for which a separate measurement of cost is undertaken, such as a product, service, department or project. Cost objects enhance transparency in the allocation, reporting and control of costs in an organization.
A cost unit is a one single individual unit of what a business produces–product or service–in relation to which costs are separately measured, such as a university student, hospital patient, hotel room, lawyer’s chargeable hour, or a car manufacturer’s vehicle.
Cost center is an organizational unit that ultimately carries the cost objects in the accounting system because it produces the cost units, such as a particular production department, service department, business function or project.
Cost accounts are general ledger accounts in a company’s chart of accounts, which are used to record cost related journal entries into an accounting system as debits or credits, and to eventually produce a set of financial statements. Cost transactions are typically posted into expense accounts.
John works as a mechanic for a company that produces cars, making sure all manufacturing equipment work well on the production line of a car model Type XYZ in a Factory ABC.
John needs a new mechanic tool set approximately once a month.
How would you categorize John’s tools in the company’s accounting system?
| Example: John’s Cleaning Supplies | ||
|---|---|---|
| Term | Example | Explanation |
| Cost Object | Factory Maintenance department | The car company tracks costs for each of its factory departments separately. John works in the Maintenance department. |
| Cost Unit | One unit of a car vehicle Type XYZ | John maintains the production line of a car model Type XYZ. Calculating costs per vehicle unit produced enables the company to set pricing in a way that the final price of a car covers both its direct and indirect costs, along with a healthy profit margin. |
| Cost Centre | Factory ABC | The business unit that is ultimately responsible for the cost of John’s tools is Factory ABC in which he maintains the car production line. |
| Cost Account | Expense Account #34567 | In the company’s accounting system, the tools will be recorded under an expense account number 34567 [Expense (3xxxx) – Mechanic Tools (x4xxx) - Manufacturing (xx5xx) - Maintenance (xxx6x) - Factory ABC (xxxx7)] |
| Cost Driver | Car vehicle units produced | The more cars the production equipment produces, the more maintenance it requires. |
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