by COST OBJECT
Cost Object is anything for which a separate measurement of cost is desired. It is the specific item, activity, service, department, or product to which costs are identified, measured, and assigned. In cost accounting, identifying the correct cost object is essential for accurate cost determination and cost control.
A cost object may vary depending on the purpose of costing. For example, a product may be a cost object for pricing decisions, while a department or activity may be a cost object for performance evaluation.
Definition of Cost Object
According to cost accounting principles,
“A cost object is any activity, product, service, or unit for which costs are measured.”
Examples of Cost Object
Common examples of cost objects include:
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A product (e.g., a chair manufactured by a furniture company)
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A service (e.g., cost per patient in a hospital)
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A job or contract (e.g., printing job, construction contract)
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A department (e.g., production department, maintenance department)
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An activity (e.g., machine setup, quality inspection)
Types of Cost Object
In cost accounting, a cost object refers to anything for which costs are separately identified, measured, and analyzed. The nature of a cost object depends on the purpose of cost measurement such as pricing, cost control, performance evaluation, or decision-making. Different types of cost objects are used in organizations depending on their operational structure and managerial requirements. The major types of cost objects are explained below.
1. Product as a Cost Object
A product is the most common type of cost object in manufacturing organizations. When costs are accumulated and measured for a specific product or unit of output, the product becomes the cost object. All costs such as direct material, direct labour, and manufacturing overheads are assigned to the product to determine its total and per-unit cost.
Product cost objects are essential for pricing decisions, profitability analysis, inventory valuation, and cost comparison. For example, in a furniture manufacturing company, the cost of producing a chair or table is separately calculated to determine selling price and profit margin. Accurate product costing helps management remain competitive in the market.
2. Service as a Cost Object
In service-oriented organizations, services are treated as cost objects instead of tangible products. The cost of providing a specific service is measured and analyzed to ensure efficiency and profitability.
Examples include cost per patient in hospitals, cost per student in educational institutions, cost per room in hotels, or cost per kilometer in transport services. Service cost objects help management in fixing service charges, controlling operational costs, and improving service quality. Since services are intangible, careful identification and measurement of costs are necessary for accurate costing.
3. Job or Contract as a Cost Object
Under job costing and contract costing systems, each job or contract is considered a separate cost object. Costs are collected job-wise or contract-wise to determine the total cost and profit of each job.
This type of cost object is suitable for industries where production is based on customer orders or large projects, such as printing presses, repair workshops, construction companies, and shipbuilding industries. Treating each job or contract as a cost object helps management assess job profitability, cost efficiency, and performance evaluation.
4. Department as a Cost Object
A department can also be treated as a cost object, especially in large organizations with multiple functional or production departments. Costs are accumulated department-wise to measure the efficiency and performance of each department.
For example, production, maintenance, quality control, and packing departments may be treated as separate cost objects. Departmental cost objects are useful for overhead allocation, cost control, inter-departmental comparison, and managerial accountability. This approach encourages departmental managers to control costs and improve efficiency.
5. Activity as a Cost Object
In modern costing systems, particularly Activity-Based Costing (ABC), an activity is treated as a cost object. Activities such as machine setup, material handling, inspection, and order processing consume resources and incur costs.
By identifying activities as cost objects, overheads are allocated more accurately based on actual resource usage. This method provides better cost information for pricing, product mix decisions, and cost reduction strategies. Activity cost objects are especially useful in organizations with complex production processes and high overhead costs.
6. Customer as a Cost Object
In some organizations, particularly service and marketing-oriented businesses, a customer is treated as a cost object. Costs incurred in acquiring, servicing, and retaining a customer are identified and analyzed.
This helps management understand customer profitability, design customer-specific pricing strategies, and improve customer relationship management. Customer cost objects are increasingly important in competitive markets where customer satisfaction and retention are critical.
Cost Object vs Cost Unit vs Cost Centre
| Basis of Comparison | Cost Object | Cost Unit | Cost Centre |
|---|---|---|---|
| Meaning | Anything for which cost is measured | A unit of product or service for cost measurement | A location, department, or person where cost is incurred |
| Nature | Broad and flexible concept | Specific and quantitative | Organizational and functional |
| Scope | Very wide | Limited and definite | Medium |
| Purpose | To identify and assign costs | To express cost per unit | To control and accumulate costs |
| Focus | What cost is calculated for | How cost is measured | Where cost is incurred |
| Measurement | May or may not be measurable in units | Always measurable in units | Not measured in units |
| Example Type | Product, service, job, activity | Per unit, per kg, per km | Production department, machine |
| Basis of Identification | Managerial requirement | Nature of output | Organizational structure |
| Use in Costing | Used for cost assignment | Used for cost expression | Used for cost collection |
| Role in Cost Control | Indirect role | No direct role | Direct role |
| Flexibility | Highly flexible | Rigid | Moderately flexible |
| Relationship with Costs | Costs are traced to it | Cost is divided by units | Costs originate here |
| Time Orientation | Can be short or long term | Usually short term | Continuous |
| Relevance in ABC | Central concept | Secondary | Supporting |
| Practical Example | Cost of a hospital patient | Cost per patient per day | ICU ward, OPD department |
COST BEHAVIOR
Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting.
Cost behavior is the manner in which expenses are impacted by changes in business activity. A business manager should be aware of cost behaviors when constructing the annual budget, to anticipate whether any costs will spike or decline. For example, if the usage of a production line is approaching its maximum capacity, the relevant cost behavior would be to expect a large cost increase (to pay for an equipment expansion) if the incremental demand level increases by a small additional amount. Understanding cost behavior is a critical aspect of cost-volume-profit analysis.
cost drivers provide two important roles for the management accountant:
(1) Enabling the assignment of costs to cost objects.
(2) Explaining cost behavior: how total costs change as the cost driver changes. Generally, an increase in a cost driver will cause an increase in total cost. Occasionally, the relationship is inverse; for example, assume the cost driver is degree of temperature, then in the colder times of the year, increases in this cost driver will decrease total heating cost. Cost drivers can be used to provide both the cost assignment and cost behavior roles at the same time. In the remainder of this section, we focus on the cost behavior role of cost drivers. Most firms, especially those following the cost leadership strategy, use cost management to maintain or improve their competitive position.
Cost management requires a good understanding of how the total cost of a cost object changes as the cost drivers change. The four types of cost drivers are activity-based, volume-based, structural, and executional. Activity-based cost drivers are developed at a detailed level of operations and are associated with a given manufacturing activity (or activity in providing a service), such as machine setup, product inspection, materials handling, or packaging. In contrast, volume-based cost drivers are developed at an aggregate level, such as an output level for the number of units produced. Structural and executional cost drivers involve strategic and operational decisions that affect the relationship between these cost drivers and total cost.
FOUR types of cost behavior are usually:
- Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases.
- Variable costs. The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity.
- Mixed or semivariable costs. These costs are partially fixed and partially variable.
- Stepped fixed costs This is a type of fixed cost that is only fixed within certain levelsof activity. Once the upper limit of an activity level is reached then anew higher level of fixed cost becomes relevant.
