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 can be applied 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 (e.g., consulting services with a specified cost).
- Goods (e.g., raw materials for product production).
- Products (e.g., a product whose cost of design, development, and production is specified).
- Projects(e.g., a product design project).
- Customers (e.g., a customer for whom the cost of selling or the cost of service delivery is specified).
- Contracts (e.g., a warranty support contract, whose cost of creation and delivery is specified).
- Resources (e.g., fuel used to operate vehicles, with a specified cost).
- Activities (e.g., Using a vehicle to deliver goods, at a specific cost).
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.