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What is a Cost Object?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 15 September 2016
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    Conjecture Corporation
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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.

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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.

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Melonlity
Post 3

@Logicfest -- Research and development costs, marketing, shipping and other costs are quite high. That $800 smart phone that cost $200 to manufacture in parts and labor does not yield $600 or even $500 in profit. Designing that phone, shipping it to stores and promoting it costs a lot of money.

Think about it. Do you think companies are really moving jobs overseas just to maximize profits? Consumers would throw a fit. No, companies are moving jobs because they need to be able to cut costs low enough to compete and survive.

Logicfest
Post 2

@Markerrag -- That is sort of true in a general sense, but some have made the very good point that sending labor overseas to save a few bucks is harmful to the overall economy.

Here's what I mean. When Henry Ford started making cars, he made it a priority to pay workers enough to afford them. Why? Because he understood that his market was only as strong as the workforce that supported it. Lose that connection and you've got problems. The United States might be the largest consumer market in the world, but how long can that last if we gut manufacturing?

Besides, I am not convinced that sending jobs overseas realizes the savings to consumers that companies claim

. Let's say you've got a smartphone that costs consumers $800 but costs $200 in parts and labor to manufacture. Roughly, you are looking at a $600 profit per item minus such minor costs as research and development and marketing.

Let's say that results in a $500 profit to the manufacturer. The shareholders of that company benefit, but the consumers certainly do not.

Markerrag
Post 1

We've seen how important this analysis is in the manufacturing realm, haven't we? How many companies out there try to offer the best price possible by making things with the lowest priced labor possible? Most of them, and that is exactly why the manufacturing industry in the United States has been shrinking for years. When labor costs get too high, companies can simply look for sources in other countries where salaries are considerably lower.

While this concept sounds horrible, keep in mind that the end result is better prices for consumers. We actually do benefit when companies look to control costs by looking for ways to use cheaper labor.

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