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Cost objects are inputs that increase the cost of producing a good or service. Manufacturing companies use tangible cost objects like raw materials and labor, while service companies use activities like customer service or retail services. Companies can track these costs by establishing cost or revenue centers.
A cost object is an item that represents an input that a business needs to produce a good or service. Many manufacturing or production companies have a cost in their business processes. Each entry represents an increase in the cost of the item produced. To pay for these inputs, firms must sell the good produced at a price at least equal to the costs of production. Prices above the cost of production provide the company with profits that allow the producer to earn 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 such as wood, stone, metal, plastic, or other items. Labor is the labor provided by individuals who choose to work for the company in exchange for remuneration for services. These tangible items generally have a fixed cost. For example, raw materials have a specific cost for the quantity and style of materials needed. Labor is fixed and variable as a cost object. Although individual hourly rates are a fixed cost, the company will pay more in costs as it employs workers longer hours.
Utility companies may also have a specific cost object. Instead of tangible fixed inputs to produce goods, service companies focus on activities that increase costs and the value of the company. Examples of these activities include: renting out hotel rooms, customer service agents handling problems for customers, cleaning spaces around company facilities, or retail services selling products to customers who visit the store. Each of these service activities is 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 cost objects that occur in business operations, companies may decide to establish departments such 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 between these areas of the company. Revenue centers have revenue generating activities and cost activities, such as the sales or food service department of a hotel. Even though the company generates revenue, it will have costs that need to be tracked to ensure they stay in line with the company’s budget.
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