Definition: A cost object is a managerial term for a product, process, department, or customer that costs originate from or are associated with. In other words, it’s something that costs can be identified with and traced back to.
What Does Cost Object Mean?
In the production process of any manufacturer, accountants and managers want to be trace costs back to the thing that creates them in order to streamline operations and increase efficiencies. These traceable costs or direct costs are expenses that can be traced back to a single cost object. Accountants can look at the expenses or outlays of cash and figure out where it was spent and why.
Example
Take a production process for example. When a company makes a product, it spends money on raw materials. This cost can be traced back to the products that the materials went into. Thus, the product is the cost object. It generates the costs and all the expenses can be traced back to it or associated with it.
Other direct costs for a product can include salaries for production employees, equipment purchased to produce the products, and maintenance done on assembly line.
Keep in mind that anything that generates costs or has expenses associated with it can be considered a cost object. This isn’t reserved to just products. A department like the sales department can be an object. There are many selling expenses that are traceable back to the sales department including rent for selling space, sales staff salaries, and displays for promotion and selling purposes.
Even customers can be considered objects if they have cost and expenses attributed to them. For instance, special delivery costs can be associated with specific customers.
Managerial accountants use all of these costs and their cost objects to analyze activity based costing models and identify ways that the company can be more efficient.
