A cost object is an item that represents an input a company needs to produce a good or service. Many manufacturing or production companies have a cost object in their business processes. Each input represents an increase in the cost of the item produced. In order to pay for these inputs, companies must sell the produced good at a price at least equal to the production costs. Prices higher than the production cost provide the company with profit that allows the producer to make money or expand current business operations.
Most production companies use a cost object that is tangible, such as raw materials or labor. Raw materials include items like timber, stone, metal, plastic or other items. Labor is the manpower provided by individuals who decide to work for the company in return for remuneration for services. These tangible items typically have a fixed cost. For example, raw materials have a specific cost for the amount and style of materials needed. Labor is fixed and variable as a cost object. While the individual hourly rates are a fixed cost, the company will pay more in costs as it employs workers at longer hours.
Service companies can also have a specific cost object. Rather than tangible fixed inputs for producing goods, service companies focus on activities that increase the costs — and value — of the company. Examples of these activities include: renting rooms at a hotel, customer service agents who handle problems for customers, cleaning the spaces around the company’s facilities or retail services who sell goods to customers visiting the store. Each of these service activities are a cost object that will have an inherent cost in the process. The most common way that companies track these costs is to use activity based costing, which identifies all activities that will increase the company’s costs.
In order to track the cost objects that occur in business operations, companies may decide to set up departments as a cost or revenue center. Cost centers represent departments that only have costs generated by their activities. Examples of these department types include marketing, production or maintenance. While they provide value, there is no revenue generation among these areas of the company. Revenue centers have revenue generating activities and cost activities, such as sales or the food service department of a hotel. Even though the company generates revenues, it will have costs that need tracking to ensure they remain in line with the company’s budget.