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.
A cost object is a term used primarily in cost accounting to describe something to which costs are assigned. Common examples of cost objects are: product lines, geographic territories, customers, departments or anything else for which management would like to quantify cost.
The use of cost objects is very common with activity based costing systems.
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.
A cost object may be the subject of considerable ongoing scrutiny, but more commonly a company will only accumulate costs for it occasionally, to see if there has been any significant change since the last analysis. This is because most accounting systems are not designed to accumulate costs for specific cost objects, and so must be reconfigured to do so on a project basis. An annual review is common for many cost objects. If an analysis is especially complex, the review may be at an even longer interval.