Cost Driver | Cost Object | Cost Unit | Cost Center | Cost Account

What's the difference between Cost Driver, Cost Object, Cost Unit, Cost Center and Cost Account?

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Example: Electricity units consumed as a basis for an electricity bill.

Cost Driver

Resources consumed as a direct cause of the total cost incurred.

Example: Electricity units consumed as a basis for an electricity bill.

Example: Product, service, department or project.

Cost Object

Part of a business for which costs are separately measured.

Example: Product, service, department or project.

Example: Product unit manufactured, chargeable hour of service provided.

Cost Unit

Individual unit of product or service in relation to which costs are separately measured.

Example: Product unit manufactured, chargeable hour of service provided.

Example: Production department, service department, business function.

Cost Center

Oganizational unit that contains cost objects and produces cost units.

Example: Production department, service department, business function.

Example: Cost related journal entry posted to an expense account.

Cost Account

General ledger account in a company’s accounting system.

Example: Cost related journal entry posted to an expense account.

Cost Driver

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.

Cost Object

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.

Cost Unit

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

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 Account

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.

Example:

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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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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