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Cost Object in Cost Accounting
Definition, Meaning Explained, and Usage in Accounting

 

In the accountant's view, every item in the budget or in the accounting system that has a cost figure of its own may be called a cost object.

A cost object is a broad term that can include activities, projects, organizations, intangible assets, and many other resources.

What is a Cost Object?

Cost object is a term used in budgeting, planning, and accounting, referring simply to any item associated with a cost figure of its own.

The term applies to a very wide range of items whose costs maybe found by estimation, by direct measurement, or by allocation or apportionment. Cost object items may include, for instance:

  • Services (such as consulting services with a specified cost).
  • Goods (such as raw materials for produing products).
  • Products (for example, a product whose costs of design, development, and production are specified).
  • Projects (for example, a product design project).
  • Customers (customers when the cost of selling or service delivery is known).
  • Contracts (such as, a product warranty support contract, when the costs of contract creation and service delivery are known).
  • Resources (for example, fuel for operating vehicles).
  • Activities (such as use of a vehicle to deliver goods).

Account vs. Cost Object: What's the Difference?

The list of kinds of cost object items could extend indefinitely. A cost object is not the same thing as an account from the organization's chart of accounts.

  • An account is a place holder for a category of financial transactions. A chart of accounts might contain, for instance, an expense category account for office supplies. Transactions are entered into these and other kinds of accounts as debits or credits. At the end of the accounting period, the firm reports  a total for each transaction category (for each  account).
  • A cost object is a specific instance of an item, whose cost can be given, either by estimation, cost allocation, or direct measurement. Office supplies for a specific division, for a specific period of time, are a cost object if a cost figure for these supplies can be measured or otherwise assigned.

Cost Objects in Budgeting

The identification and costing of cost objects is central to budgetary planning, where planners will consider both actual historical costs for sets of cost objects (e.g., office supplies or employee salaries), and likely future cost needs for the same cost objects.

Cost Objects in Financial Reporting

The identification and costing of cost objects supports the preparation of financial accounting reports. The identity of cost objects (e.g., factory labor) and the way they are used (e.g., either in direct product production or as indirect manufacturing support) determine which accounts are impacted and the figures reported.