Learning Objective 1 Define and illustrate a cost object
examples of cost objects are products, services, activities, processes, and customers
A cost is the monetary value of resources (such as labor) sacrificed or forgone to achieve a specific objective. A cost is usually measured as the amount that must be paid to acquire the resources consumed. An actual cost is a cost that has been incurred (a historical or past cost) and is distinguished from a budgeted cost, which is a forecasted, or predicted, cost (a future cost).
When you think of a cost, you invariably think of it in the context of putting a monetary value on a particular thing. We call this “thing” a cost object, which is anything for which a cost measurement is desired. Suppose you’re a manager at Tesla’s car manufacturing plant in Fremont, California (called the “Tesla Factory”). Can you identify some cost objects that would be important to you as a plant manager? Now look at Exhibit 2-1.
Exhibit 2-1
Examples of Cost Objects at Tesla
The six cost objects of BMW with the illustration are as follows:
Product
Illustration: A Tesla Model 3 vehicle
Service
Illustration: Telephone hotline providing information and assistance to Tesla stores and galleries
Project
Illustration: R&D project on an electric Tesla truck.
Customer
Illustration: The Dubai Road and Transport Authority (RTA), which is building a large fleet of electric taxis in the city
Activity
Illustration: Setting up machines for production or maintaining production equipment.
Department
Illustration: Worker health and safety department.
You will see that Tesla managers not only want to know the cost of the different products, such as the Model 3, but they also want to know the costs of services, projects, activities, departments, and supporting customers. Managers use their knowledge of these costs to guide decisions about, for example, product innovation, quality, and customer service.
Now think about whether a manager at the Tesla Factory might want to know the actual cost or the budgeted cost of a cost object. Managers oftentimes need to know both types of costs when making decisions. For example, comparing actual costs to budgeted costs helps managers evaluate how well they controlled costs and learn about how they can do better in the future.
How does a cost measurement system determine the costs of various cost objects? Typically in two stages: accumulation followed by assignment. Cost accumulation is the collection of cost data in some organized way by means of an accounting system. For example, at its Fremont car factory, Tesla collects (accumulates) in various categories the costs of different types of materials, different classifications of labor, the costs incurred for supervision, and so on. In the next step, the accumulated costs are then assigned to designated cost objects, such as the different models of electric cars that Tesla manufactures at the Tesla Factory. Tesla managers use this cost information in two main ways: (1) to make decisions, for example, about how to price different models of cars or how much to invest in R&D and marketing and (2) to implement decisions, for example, by providing bonuses to employees to motivate cost reductions.
Now that we know why it is useful for management accountants to assign costs, we turn our attention to some concepts that will help us do it. Again, think of the different types of costs that we just discussed: materials, labor, and supervision. You are probably thinking that some costs, such as the costs of materials, are easier to assign to a cost object than others, such as the costs of supervision. As you will learn, this is indeed the case.
