Cost Object

A cost object is anything for which a company wants to separately measure cost — most often a product, a service, a department, a customer, a project, or an activity. The term is deliberately broad, because cost accounting is used to answer many different questions, and each question requires defining a different cost object as the thing whose cost is actually being measured and analyzed.

A product is the most familiar cost object: a manufacturer wants to know the cost of making one unit of a particular item, which requires tracking direct materials, direct labor, and manufacturing overhead specifically for that product. A department can also be a cost object, such as a factory's maintenance department, whose own costs — wages, supplies, equipment — are tracked before those costs are, in turn, assigned onward to the production departments the maintenance department supports. A customer can be a cost object when a company wants to know whether a particular account is actually profitable once the cost of serving it, including support, discounts, and shipping, is fully accounted for, and an activity, such as setting up a machine for a production run, can be a cost object in activity-based costing.

Whether a particular cost is a direct cost or an indirect cost depends entirely on which cost object is being considered — the same cost can be direct relative to one cost object and indirect relative to another. The salary of a factory maintenance supervisor is a direct cost of the maintenance department, since it is entirely incurred for that department's own operation, but it is an indirect cost of any individual product manufactured in the factory, since it cannot be traced to a specific product without some method of allocation.

Cost accounting results can be misleading if the cost object is defined too broadly or too narrowly for the question actually being asked — measuring cost at the level of an entire product line when the real decision concerns one specific product variant within that line, for instance, can hide meaningful profitability differences between individual items. Businesses using activity-based costing often define cost objects at multiple levels simultaneously — unit, batch, product-line, and customer, for example — precisely because a single cost object definition rarely answers every question management actually needs answered.

Choosing the right cost object is often the first and most important step in any cost analysis, since it determines which costs are relevant to the decision at hand and which costs can be safely ignored as unrelated to that particular object. A company deciding whether to drop a product line, for example, needs to measure costs with the product line itself as the cost object, carefully distinguishing costs that would genuinely disappear if the line were dropped from shared costs that would simply be reassigned to the remaining product lines instead.