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18/08/2018 09:57:00 PM

Cost object

A cost object is often a product or department for which costs are accumulated or measured. For example, a product is the cost object for direct materials, direct labor and manufacturing overhead. The factory maintenance department is a cost object for the cost of the maintenance employees and the maintenance supplies. Later the factory maintenance department costs will be assigned to products, which are also cost objects. 


A cost object can also be a customer, a machine, a group of machines, a group of employees, etc.

Direct costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible (cost-effective) way. For example, the cost of steel or tires is a direct cost of BMW X5s. The cost of the steel or tires can be easily traced to or identified with the BMW X5. The workers on the BMW X5 line request materials from the warehouse and the material requisition document identifies the cost of the materials supplied to the X5. In a similar vein, individual workers record the time spent working on the X5 on time sheets. The cost of this labor can easily be traced to the X5 and is another example of a direct cost. The term cost tracingis used to describe the assignment of direct costs to a particular cost object.

 Indirect costs of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way. For example, the salaries of plant administrators (including the plant manager) who oversee production of the many different types of cars produced at the Spartanburg plant are an indirect cost of the X5s.

Plant administration costs are related to the cost object (X5s) because plant administration is necessary for managing the production of X5s. Plant administration costs are indirect costs because plant administrators also oversee the production of other products, such as the Z4 Roadster. Unlike the cost of steel or tires, there is no requisition of plant administration services and it is virtually impossible to trace plant administration costs to the X5 line. The term cost allocationis used to describe the assignment of indirect costs to a particular cost object. Cost assignmentis a general term that encompasses both (1) tracing direct costs to a cost object and (2) allocating indirect costs to a cost object. Exhibit 2-2 depicts direct costs and indirect costs and both forms of cost assignment—cost tracing and cost allocation—using the example of the BMW X5.

A cost object is any item for which costs are being separately measured. It is a key concept used in managing the costs of a business. Here are some types of cost objects:

  • Output. The most common cost objects are a company's products and services, since it wants to know the cost of its output for profitability analysis and price setting.
  • Operational. A cost object can be within a company, such as a department, machining operation, production line, or process. For example, you could track the cost of designing a new product, or a customer service call, or of reworking a returned product.
  • Business relationship. A cost object can be outside of a company - there may be a need to accumulate costs for a supplier or a customer, to determine the cost of dealing with that entity. Another variation on the concept is the cost of renewing a license with a government agency.

It may be necessary to have a cost object in order to derive pricing from a baseline cost, or to see if costs are reasonable, or to derive the full cost of a relationship with another entity. 

 


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