Everything you need to know about cost objects [explained by a Certified Accountant]
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.
Cost objects can take many different forms, let’s take a look at the most widely used ones:
Top 10 examples of the most common cost objects are:
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:
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.
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:
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.
There are three main types of cost objects:
Here are the details of the three main types of cost objects in cost accounting and costing systems:
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.
An operational cost object can be any element within a business that a company wants to track costs for separately, including:
For example, an event management company is likely to track costs associated with each one of the events it organizes.
Business relationships are external cost objects outside of a company that help the business survive and thrive, such as:
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.
Cost objects enable more granular, transparent, accurate and effective financial planning, management and decision making, even–and especially–across many different business segments:
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.
Identifying and correctly assigning expenses to cost objects increases the accuracy of financial planning and the analysis of historical costs against actuals.
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.
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.
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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