cost object

Picture a parent at the end of the month asking, 'How much did each child cost me this month?' To answer, you first have to decide what the 'thing' is whose cost you want — one child? the whole household? the family car? the summer holiday? Whatever you point at and say 'add up the cost of THAT' is a cost object. Accounting works the same way: before you can measure a cost, you must name the thing the cost belongs to.

Precisely, a cost object is anything for which a company wants to measure a separate cost. It can be a product (one pizza), a service (one haircut), a project (building a bridge), a department (the maintenance shop), a customer (a key client), an activity (processing an order), or a whole region. Costs are then traced or allocated to that object. For example, if a bakery wants the cost of one loaf of bread, the loaf is the cost object, and the flour, the baker's time, and a slice of the oven's electricity are gathered against it to get, say, 1.80 per loaf. Choosing a different cost object — say the whole 'bread department' rather than one loaf — changes which costs you collect and how you collect them.

This matters because almost every managerial decision starts by fixing the cost object, and getting it wrong quietly poisons the answer. The same dollar of factory rent is a direct cost of the cost object 'the factory' but an indirect cost of the cost object 'one chair made in the factory.' So whether a cost counts as direct or indirect, fixed or variable, relevant or not, all depend on the cost object you have chosen. Naming the cost object clearly is the unglamorous first step that makes every later cost number meaningful.