What is a cost object?

A cost object is any item for which you are separately measuring costs.

It may be necessary to have a cost object in order to derive pricing from a baseline cost, or to see if costs are reasonable, or to derive the full cost of a relationship with another entity. Here are some types of cost objects:

• Output. The most common cost objects are a company's products and services, since it wants to know the cost of its output for profitability analysis and price setting.
• Operational. A cost object can be within a company, such as a department, machining operation, or process. For example, you could track the cost of designing a new product, or a customer service call, or of reworking a returned product.
• Business relationship. A cost object can be outside of a company - there may be a need to accumulate costs for a supplier or a customer, to determine the cost of dealing with that entity.

A cost object may be the subject of considerable ongoing scrutiny, but more commonly a company will only accumulate costs for it occasionally, to see if there has been any significant change since the last analysis. An annual review is common for most cost objects.

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