cost object

Managerial accounting is the art of planning, decision making and controlling in business. In order to do that, we must identify what we want to track. Are we looking at a product, a store, a department within the company, or even a customer? Since managerial accounting gives us so much flexibility, we need to make sure we understand to what we want to assign costs.

cost object is anything for which a company wants to assign costs. Cost objects can take many different forms including:

  1. Individual units of a product
  2. An order for a specific customer
  3. A product line
  4. A department within the company, like the marketing or human resources department
  5. A geographic segment of the business
  6. A store
  7. A service provided by the company
  8. A customer

There is almost no limit to what you can identify as a cost object as long as you can find a way to assign costs to it. The most important aspect of determining a cost object is the ability to assign costs in order to get a complete picture to plan, make decisions and perform controlling activities. If you cannot fully assign costs to the object, you may want to consider if the object chosen is the correct one. In most cases, we can find ways to assign costs, however.

Direct and Indirect Costs

All costs related to a cost object are either direct costs or indirect costs.

direct cost is a cost that is easy to trace to a cost object. For an accounting or law firm, it is easy to trace the number of hours and cost of working on a client because all staff is required to assign their time to clients throughout the work week. Engines used in a Boeing 747 are easy to trace to each plane and therefore the cost is easy to calculate. The salaries for marketing employees are easy to trace to the marketing department of a company. Direct costs are assigned to a cost object easily.

An indirect cost is a cost that must be allocated to a cost object because it cannot be directly traced to the cost object. The cost of a receptionist in an accounting firm is hard to allocate to individual clients because his or her time is not being tracked by client. Supervisors at the Boeing plant are supervising employees working on several different projects and it is impractical to track his or her time to each individual plane. Some materials are so insignificant that the cost of tracking how much glue goes into a product outweighs the benefit of knowing the cost of glue per unit.

Sometimes it is possible for a cost to be a direct cost for one cost object and an indirect cost for another object. For example if my cost object is the marketing department, costs associated with marketing salaries are a direct cost which are easy to assign to the marketing department. However, if the cost object is one of 20 products a company manufactures, the marketing salaries are an indirect cost for that product since the cost is not easy to trace back to our cost object.

Related Videos

Types of Businesses, Product Costs and Period Costs

Share This:


Related pages


meaning of variable expensescost of goods sold ending inventoryhow to calculate overhead cost using activity based costinghow to calculate ending inventoryextended warranty accountingprocess costing weighted average methodinvestment turnover ratio formulanet to gross payrollfour closing journal entriesquickbooks fixed asset depreciationall adjusting entries always involvehow to calculate wacmarket value of a bond calculatorsales accrual journal entryhow much medicare tax is withheldpresent value factor for an ordinary annuityexample of cash accountingjournal entry for sales and cost of goods soldhow to calculate the salvage valueallowance for doubtful accounts debit or credithow to calculate closing stock from trial balanceformula retained earningsblanket overhead rateabsorption based costingending inventory equationbalance sheet reconciliations examplesprepaid insurance in balance sheetdifference between credited and debitedjanitor uniformsasset turnover rate formuladirect write off method gaapperpetual inventory vs periodic inventoryaccrued wages payabletax provision accounting entriescalculate present value of annuityformula for calculating gross salarywhat is reconciling a checking accountaccrued interest entryadjusting entries for notes payableprepare an income statement using absorption costinghow to compute gross salesdeferred income journal entryunearned revenue asset or liabilitycalculating finished goods inventorywhen an account becomes uncollectible and must be written offwage calculation formulaformula straight line depreciationdisposing of furniturehow to calculate fixed manufacturing overhead costs3 examples of fixed expensesaccounting for outstanding checkscontribution margin in dollars formulawhat goes on the debit side of a trial balancemerchandise inventory debit or creditpricing decision and cost managementpv annuity factor tabledepreciation calculator double decliningactivity cost allocation rate formulameaning of job costinghow do you calculate ficathe fica tax paid by an employer isa discount on bonds payabledebit balance and credit balance differencefica tax rate 2014total conversion cost formulaaccounting entry for prepaid expensesjob costing example problemrecording adjusting entriespresent value of a lump sum formulahow to find notes payableabsorbing costingcost of good sold formula accountingmeaning of cash discountjournal entry of accounts payable