Everything you need to know about cost objects [explained by a Certified Accountant]

Definition: What is a Cost Object?

A cost object is a financial term used in management accounting that represents any part of a business for which costs are being separately assigned, measured, accumulated and monitored; such as a product, service, customer, department or project.

A cost object is a broad term applicable to any business element that generates costs and a company wants to quantify the cost of for the purpose of planning, controlling, decision making and other cost management activities.

In fact, there is almost no limit to what can be classified as a cost object, as long as a company has a reliable and consistent method to assign costs to it like estimation, direct measurement, allocation or apportionment.

10 Examples: What Are the Examples of Cost Objects?

Cost objects can take many different forms, let’s take a look at the most widely used ones:

Top 10 Examples of Cost Objects

Top 10 examples of the most common cost objects are:

  1. Product
  2. Service
  3. Customer
  4. Supplier
  5. Project
  6. Division, department, store, branch, business unit
  7. Activity, contract, job
  8. Brand category
  9. Resource
  10. Intangible asset
  11. Geographic region

Examples of Costs Associated With Cost Objects

Product Cost Object Example

When a company makes a product, it spends money on a wide variety of direct and indirect costs, which may be allocated to the product cost object, such as:

  • Direct materials (i.e., raw materials and supplies consumed during the manufacturing process)
  • Direct labor (e.g., salaries and wages of production line employees)
  • Manufacturing overhead (e.g., factory utilities, maintenance and supervisor salaries)
  • Packaging, packing and transportation
  • Administrative overhead (e.g., general head-office management costs)
  • Research, design and development of new products
  • Production equipment used to manufacture the goods

In this case, the product is the cost object to which all of these expenses may be traced back to or associated with, usually as part of the price setting process.

Departmental Cost Object Example

Similarly, a company may want to know the cost of operating a department, in which case the department is the cost object for the expenses traceable to that particular department, such as:

  • Factory maintenance department is a cost object for the cost of the supplies and staff required for factory maintenance.
  • Sales department is the cost object for the cost of sales staff salaries, showroom rent, stationery costs, marketing and advertising expenses.

Here, the expenses associated with the maintenance and sales department cost objects can also be assigned to the company’s product cost objects in order to set the price of the final products.

Other Cost Object Examples

  • Service: Cost of providing a specific consulting, accounting or audit service to customers
  • Project: Cost of a project to design a specific product and its packaging
  • Contract: Cost of servicing a product warranty support contract
  • Customers: Selling, delivery and service costs associated with a specific large customer

3 Types of Cost Objects

There are three main types of cost objects:

  1. Output cost objects are products and services offered by a company.
  2. Operational cost object are projects, departments, processes and other objects within a business.
  3. Business relationships are customers and other cost objects outside of a company.

Here are the details of the three main types of cost objects in cost accounting and costing systems:

1. Output

Arguably, the most common and important cost object is a company’s output, meaning its product and service offering.

This is because every company needs to understand the breakeven cost of its product and service output so it can set the pricing accordingly to achieve desirable profit margins and ensure continuous profitability of the business.

2. Operational

An operational cost object can be any element within a business that a company wants to track costs for separately, including:

  • Production line
  • Machine
  • Process
  • Department
  • Function
  • Division
  • Region
  • Project
  • Activity
  • Resource
  • Event

For example, an event management company is likely to track costs associated with each one of the events it organizes.

3. Business relationship

Business relationships are external cost objects outside of a company that help the business survive and thrive, such as:

  • Customers (e.g., promotional offers)
  • Suppliers (e.g., commissions)
  • Government agencies (e.g., licensing fees)
  • Trade associations (e.g., trade membership fees)

For example, a company may track the costs associated with dealing with a specific third party entity, such as an individual large customer, supplier, or even a government agency.

Benefits: How are Cost Objects Used?

Cost objects enable more granular, transparent, accurate and effective financial planning, management and decision making, even–and especially–across many different business segments:

1. Cost Control

Regular cost object monitoring and analysis can help a company optimize cost spend, identify efficiencies and streamline operations over time.

Cost objects are used by many widely used methods–like activity based costing (ABC)–to allocate direct and direct costs.

2. Budgeting & Forecasting

Identifying and correctly assigning expenses to cost objects increases the accuracy of financial planning and the analysis of historical costs against actuals.

3. Financial Reporting

Categorization of cost objects supports the preparation of management reports and financial statements by enabling allocation of business transactions and events into the correct accounts.

4. Pricing & Profitability

Cost objects support a company’s profitability by helping to set appropriate pricing for its products and services and maximizing the profitability in each business segment.

5. Regulations:

Usage of cost objects may support situations where rules, standards or regulations prescribe how certain costs should be recorded, measured, recognized, allocated and presented (e.g., government grant, taxation, accounting standards).

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