What Are Cost Objects? - dummies

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

A cost object is anything that causes you to incur costs. Think about a cost object as a sponge that absorbs your money. The object can be a customer, job, product line, or company division. Carefully identifying cost objects helps you cost your product or service accurately.

Assume you manage a group of plumbers. You’re reviewing the month’s mileage expense (the equivalent of gasoline) for your staff and notice a 20 percent increase from the prior month. Why? You start asking questions. As it turns out, the customer demand for plumbing work required your staff to drive more miles. The average customer lived farther away.

You grumble, “That driving ran up a lot of costs!” Yes, it did, and you do the driving to meet the needs of your customers. In this example, the cost object was the group of customers for the month. Without any customers, you wouldn’t have paid for all the gas. (Well, you wouldn’t have had any income either, but never mind that.) No cost object means no costs incurred.

Direct costs are traced to the cost object, and indirect costs are allocated to the cost object.

Indirect costs can be fixed or variable. Insurance costs on vehicles are a fixed indirect cost. The premiums are fixed, and the cost is indirect to the job because you can’t trace the vehicle insurance cost directly to a specific job. Utility costs for the office (such as heating and cooling) are variable indirect costs.

Costs vary with the weather, but as with the insurance premiums, you can’t trace them directly to any one job.

Here’s how fixed and variable costs are assigned to cost objects:

  • Direct costs

    • Variable direct costs, such as denim material, where denim jeans are the cost object

    • Fixed direct costs, such as a supervisor salary at an auto plant, where an automobile produced is the cost object

  • Indirect costs

    • Variable indirect costs, such as utility costs for a television plant, where a television produced is the cost object

    • Fixed indirect costs, such as insurance for a plumbing vehicle, where a plumbing job is the cost object