A cost object is anything for which a separate measurement of costs is desired. In other words, a cost object is a service unit for which we want to know the cost. Examples include a product, a service, a project, a customer, a brand category, an activity and a department. Manufacturing departments are either considered as cost pools of cost objects, depending upon whether management’s focus is on costs for the products or for the manufacturing departments.
The concept of cost objects is wider. It also includes a group of products, services, departments, customers and suppliers and so on. Any item, to which cost can be traced and that has a key role in the management strategy can be treated as a cost object.
Second Explanation of Cost Object
A cost object is any product, a job order, a division, any anything to which you can assign a cost. This is a very broad definition of cost objects, so let me give you some concrete examples to give you a better handle on this. Let’s say that a firm has multiple product lines. For example, you have product line #1 that makes tents. Then, product line #2 makes hiking packs, and product line #3 makes sleeping bags. Each of these product lines can be assigned costs, so they are cost objects. But it doesn’t just have to be a product or product line that we are thinking about in terms of assigning costs. We can also assign costs to customers. We can say, “How much does each customer that we have (customer #1, 2, 3, and so on), how many resources do they take up of ours? Do they call or email us? How much SG&A do we spend on these different customers?” Maybe one particular customer returns an abnormally high number of items, and so we can start assigning some costs to those customers.
So we can say, this specific customer (customer #1) is actually costing us a lot more to serve than customer #2. So, the customers themselves can actually be cost objects. We can also think about the departments within the organization. So you have the marketing department, finance department, accounting department, etc. We can assign costs to all these departments. In essence, departments themselves can be cost objects. Remember a cost object could be anything. It doesn’t really matter. What really matters is that you’ve identified something to which you would like to assign a cost, and therefore you have a cost object. So why are we assigning cost objects in the first place? Why do we care about what the costs are for the marketing department or the finance department, accounting department, or product lines? Why are we even thinking about these things?
Well, one thing that we want to do that’s really important is we want to track profitability in our firm. We want to say, “How this tent product line performing in terms of its profit margins compared to the sleeping bag product line?” If we don’t actually assign any costs to these different cost objects, then we really have no idea how profitable each of the product lines is. Beyond just thinking about the profitability, we can take this a step further and actually evaluate the performance of the managers. So now that we’ve tracked the profitability of each product line or department. We can ask, “Is the manager of the finance department or the person who’s the manager of the product line for sleeping bags, are they doing a good job?” We can look and see how they are doing with the costs. Are they having all types of unexpected costs coming up? Maybe they are spending too much. So we can think about those things, and we can also use these costs that we’re assigning to these cost objects to help us with pricing decisions.
We can think, “Okay wait a minute. We’re charging X amount for this item (for this sleeping bag), but it’s actually costing us more to produce it. So we either need to discontinue this product line or raise the price.” Assigning a cost to these cost objects can help us make that kind of decisions, and it can also help us control our costs. When we think about control in the context of cost accounting, we are basically thinking, “We’ve got this marketing department, we’ve got this accounting department, and these different departments have budgets. We want to control their spending in the sense that we want to make sure that it doesn’t exceed a certain threshold.”