Cost Object

A cost object is any segment or an element for which the cost information is desired. The accounting data item may include contract, customer, service function, product, project activity, subdivision, etc. For a cost object a separate cost measurement is recorded. The number of cost objects that would be identified and the frequency of measuring the costs will vary between organizations. For example a product cost is normally calculated on a weekly or monthly basis, whereas the cost of processing a mortgage application may only be calculated on an annual basis.

Costs are assigned for a variety of purposes like pricing, profitability studies, and control of spending. A cost object is anything for which the cost data is desired. For assigning costs the cost objects are classified into direct cost and indirect cost. A direct cost is a cost that is directly associated to the particular cost object under consideration. For example if a company has to assign costs for its regional national sales office, then the salary of the sales manager in its Calicut office, would be the direct cost of that office. An indirect cost is a cost which is not directly traceable to a particular cost object under consideration. To be traced to a cost object like for a specified product the cost must be caused by the cost object.

A cost object is considered as a tangible input for a product manufactured/Service provided. For example labor or material is a tangible input. Let us consider an example. A textile manufacturer would require a predetermined amount of labor and raw material before the clothes are manufactured. The cost of employing the labor is directly associated with “per man per hour”. Hence the labor is a cost object as it directly associated with the cost of the product. Similarly the cost of raw material is also a cost object which is directly associated with the manufacturing of the cloth.

Questions

• What is a cost object?
• How is cost object assigned to costs?