What is a cost object?

A small manufacturer sells three kinds of product. There are materials, wages and machine costs, and these must somehow end up in the cost price of each product. The products are the cost objects: the things the costs finally attach to.

It is easy to confuse a cost centre with a cost object. A cost centre answers the question of where in the business the cost arose, such as the workshop or the sales department. A cost object answers the question of what it was incurred for, such as this product, this project or this customer order. Time spent in the workshop is therefore a cost of the workshop cost centre and, at the same time, of the order it was spent on.

Direct costs, such as the raw materials for one particular order, are assigned straight to a cost object. Indirect costs, such as rent or supervision, are usually spread first over cost centres and then over the cost objects with an allocation key. In this way the cost price is built up step by step.

What goes wrong without cost objects? A service firm that only knows its total costs cannot tell which client or project earns money and which loses it. Prices are then set by feel, and a loss-making project only shows up in the year-end figures.

On a project or an order, the post-calculation is the moment you compare the actual costs of a cost object with the budgeted ones. That only works if costs were booked to the cost object while the work was going on, not pieced together afterwards from a pile of invoices.

Start small. Choose the cost objects you really want to make decisions about, and write down how costs are assigned to them. An allocation key nobody can explain produces numbers nobody trusts.