What is the cost object?
A cost object is a term used in cost accounting to refer to anything for which the cost is recorded and tracked. This can include products, services, projects, departments, and even individual customers. The main purpose of identifying and tracking cost objects is to better understand the costs associated with producing or providing a specific product or service. This information can then be used to make informed decisions about pricing, production levels, and other business strategies.
Types of cost objects
There are several types of cost objects that businesses may track, including:
Direct materials: These are the raw materials used to produce a product or provide a service. For example, the wood and paint used to manufacture a piece of furniture would be considered direct materials.
Direct labor: This refers to the wages paid to employees who directly contribute to the production of a product or service. For example, assembly line workers or customer service representatives would be considered direct labor.
Overhead: These are the indirect costs associated with producing a product or service. Overhead includes things like rent, utilities, and insurance, which are not directly tied to a specific product or service, but are necessary for the business to operate.
Joint costs: These are costs that are incurred when producing multiple products or services simultaneously. For example, a bakery that produces both bread and pastries may incur joint costs for ingredients, utilities, and labor that are shared between the two products.
How to track cost objects?
To identify and track cost objects, businesses use cost accounting systems. These systems allow businesses to assign costs to specific cost objects and track the costs over time. This helps businesses understand the costs associated with producing or providing a specific product or service, which can be useful for setting prices, managing production levels, and identifying areas for cost savings.
Cost centers:
One common way to track cost objects is through the use of cost centers. A cost center is a department or function within a business that is responsible for incurring costs. For example, a manufacturing company may have a cost center for production, another for research and development, and another for marketing. By tracking the costs incurred by each cost center, the business can better understand the costs associated with each department or function.
Cost drivers:
Another method for tracking cost objects is through the use of cost drivers. A cost driver is a factor that causes the cost of a product or service to change. For example, the number of units produced or the number of customer service calls received may be considered cost drivers for a manufacturing or service company, respectively. By tracking the cost drivers for a specific cost object, a business can better understand how changes in these factors impact the overall cost of the product or service.
Benefits of tracking cost objects
There are several benefits to tracking cost objects. First, it helps businesses better understand their costs and make informed decisions about pricing and production levels. By knowing the costs associated with producing or providing a specific product or service, businesses can set prices that are high enough to cover their costs and generate a profit, but not so high that they are not competitive in the market.
Second, tracking cost objects can help businesses identify areas for cost savings. By understanding the costs associated with producing or providing a specific product or service, businesses can identify areas where they are spending more than necessary and implement cost-saving measures.
Finally, tracking cost objects can also help businesses make informed decisions about which products or services to focus on. By understanding the costs associated with different products or services, businesses can determine which ones are the most profitable and focus their resources on those areas.
Conclusion
In conclusion, cost objects are a key concept in cost accounting that refers to anything for which the cost is recorded and tracked. By identifying and tracking cost objects, businesses can better understand the costs associated with producing or providing a specific product or service,
