cost assignment process

What is Cost Assignment?

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Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

• Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
• Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

• Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

• Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
• Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

• Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

• White bread: 3,000 loaves × $1.20 per loaf = $3,600
• Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

• White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
• Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

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What Is Cost Allocation?

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Entrepreneurs, small business owners and managers need accurate, timely financial data to run their operations. Specifically, understanding and connecting costs to items or departments helps them create budgets, develop strategies and make the best business decisions for their organizations. This is where cost allocation comes in. Detailed cost allocation reports help businesses ensure they’re charging enough to cover expenses and make a profit. 

While a detailed cost allocation report may not be vital for extremely small businesses, more complex businesses require cost allocation to optimize profitability and productivity.

What is cost allocation?

Cost allocation is the process of identifying and assigning costs to business objects, such as products, projects, departments or individual company branches. Business owners use cost allocation to calculate profitability. Costs are separated or allocated, into different categories based on the business area they impact. These amounts are then used in accounting reports . 

For example, say you’re a small clothing manufacturer. Your product line’s cost allocation would include materials, shipping and labor costs. It would also include a portion of the operation’s overhead costs. Calculating these costs consistently helps business leaders determine if profits from sales are higher than the costs of producing the product line. If not, it can help the owner pinpoint where to raise prices or cut expenses .

For a larger company, cost allocation is applied to each department or business location . Many companies also use cost allocation to determine annual bonuses for each area.

Types of costs

If you’re starting a business , the cost allocation process is relatively straightforward. However, larger businesses have many more costs that can be divided into two primary categories: direct and indirect costs:

• Purchased inventory
• Materials used to make inventory
• Direct labor costs for employees who make inventory
• Payroll for those who work in operations
• Manufacturing overhead, including rent, insurance and utilities costs
• Other overhead costs, including expenses that support the company but aren’t directly related to production, such as marketing and human resources

What is a cost driver?

A cost driver is a variable that affects business costs, such as the number of invoices issued, employee hours worked or units of electricity used. Unlike cost objects, such as units produced or departments, a cost driver reflects the reason for the incurred cost amounts. 

How to allocate costs

While cost objects vary by business type, the cost allocation process is the same regardless of what your company produces. Here are the steps involved.

1. Identify your business’s cost objects.

Determine the cost objects to which you want to allocate costs, such as units of production, number of employees or departments. Remember that anything within your business that generates an expense is a cost object. Review each product line, project and department to ensure you’ve gathered all cost objects for which you must allocate costs.

2. Create a cost pool.

Next, create a detailed list of all business costs. Categories should cover utilities, business insurance policies, rent and any other expenses your business incurs.

3. Choose the best cost allocation method for your needs.

After identifying your business’s cost objects and creating a cost pool, you must choose a cost allocation method. Several methods exist, including the following standard ones: 

• Direct materials cost method: This cost allocation method assumes all products have the same allocation base and variable rate.
• Direct labor cost method: This cost allocation method is most helpful if labor costs can be allocated to one product or if expenses vary directly with labor costs.
• High/low method. This cost allocation method is best if you have more than one cost driver and each driver has different fixed or variable rates.
• Step-up or step-down method: With this cost allocation method, departments are first ranked and then the cost of services is allocated from one service department to another in a series of steps. 
• Full absorption costing (FAC): This cost allocation method combines direct material and direct labor costs with a predetermined FAC rate based on company historical data or industry standards.
• Variable costing: Consider this cost allocation method if your business has many variable cost allocations (costs that vary by quantity) and uses significant direct labor.

4. Allocate costs.

Now that you’ve listed cost objects, created a cost pool and chosen a cost allocation method, you’re ready to allocate costs. 

Here’s a cost allocation example to help you visualize the process: 

Dave owns a business that manufactures eyeglasses. In January, Dave’s overhead costs totaled $5,000. In the same month, he produced 3,000 eyeglasses with $2 in direct labor per product. Direct materials for each pair of eyeglasses totaled $5. Here’s what cost allocation would look like for Dave: Direct costs: $5 direct materials + $2 direct labor = $7 direct costs per pair Indirect costs: Overhead allocation: $5,000 ÷ 3,000 pairs = $1.66 overhead costs per pair Direct costs: $7 per pair + Indirect costs: $1.66 per pair Total cost: $8.66 per pair

As you can see, cost allocation helps Dave determine how much he must charge wholesale for each pair of eyeglasses to make a profit. Larger companies would apply this same process to each department and product to ensure sufficient sales goals.

5. Review and adjust cost allocations.

Cost allocations are never static. To be meaningful, they must be monitored and adjusted constantly as circumstances change.

What are the benefits of cost allocation?

Accurate, regular cost allocation can bring your business the following benefits: 

• Helps you run your business: The information you glean from cost allocation reports helps you perform vital functions like preparing income tax returns and creating financial reports for investors, creditors and regulators. 
• Informs business decisions: Cost allocation is an excellent business decision tool that can help you monitor productivity and justify expenses. Cost allocation gives a detailed overview of how your business expenses are used. From this perspective, you can determine which products and services are profitable and which departments are most productive. 
• Helps produce accurate business reports: Tax accounting, financial accounting and management accounting all require some kind of cost allocation. This information is the foundation of accurate business reports. 
• Can reveal accurate production costs: Knowing what it costs to create a product, including all expenses allocated to it, is essential to making good pricing decisions and allocating resources efficiently.
• Helps you evaluate staff: Cost allocation can help you assess the performance of different departments and staff members. If a department is not profitable, staff productivity may need improvement. 

Common cost allocation mistakes

To get the most from cost allocation, avoid these common mistakes:

• Equal or inflexible allocation : Cost allocation is not as simple as allocating any given cost over different product lines or departments. Some cost objects require more time, expense or labor than others, for example.
• Missing costs: Costing is meaningless if it doesn’t include all expenses. Don’t forget costs, such as overhead, time spent and intangible expenses.
• Failing to adjust as needed: Costs and priorities in business are changing constantly. Be sure your cost allocations are monitored and adjusted to meet your information needs.
• Not considering fluctuating revenue with indirect costs: If your business is seasonal or fluctuates over time, it’s important to account for that when allocating costs. 

Cost allocation and your business

Even if you operate a very small business, it’s essential to properly allocate your expenses. Otherwise, you could make all-too-common mistakes, such as charging too little for your product or spending too much on overhead. Whether you choose to start allocating costs on your own with software or with the help of a professional small business accountant , cost allocation is a process no business owner can afford to overlook.

Dachondra Cason contributed to this article. 

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Cost Allocation

The process of identifying a company’s costs and assigning those costs to cost objects

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds  asset management  firm with $20 billion under management, and as an investment banking analyst in  SunTrust Robinson Humphrey 's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Currently an investment analyst focused on the  TMT  sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a  BS  from The Tepper School of Business at Carnegie Mellon.

• What Is Cost Allocation?
• Types Of Costs
• How To Allocate Costs
• Why Do We Need To Allocate Costs?
• Examples Of Cost Allocation & Calculations

What is Cost Allocation?

Cost allocation is the process of identifying a company’s costs and assigning those costs to cost objects. Cost objects are the products, services, and activities of different departments of a company. 

This process of allocating costs helps a business determine which parts of the company are responsible for what costs. 

Sometimes it is difficult to draw the connection between allocated costs and their cost objects. When this happens, companies can use spreading costs. 

Spreading costs occur when businesses spread the responsibility for production expenses across various areas. 

When businesses can accurately allocate their costs, they are able to easily assess what particular cost objects are creating profits and losses for the company. On the other hand, if businesses are unable to allocate their costs correctly, their profit and loss calculations will be off. 

Also, businesses must charge a price for their goods and services that covers their expenses and allows them to make a profit.  

Intuitively, one can recognize the importance of cost allocation for the optimal performance of a company. Incorrect cost allocation calculations are extremely detrimental to any business and disrupt the ability to operate properly.

Cost allocation is necessary for any business, but as companies get larger and more complex, it becomes even more important to allocate costs accurately. 

Key Takeaways

Cost allocation is fundamental and necessary for any business, big or small. 

It helps with assessing profits and losses and the management of staffing. 

Cost allocation allows companies to explain the pricing of their goods and services to customers. 

Allocating costs is necessary for companies to maintain efficiency and financial accountability. 

Types of Costs

Companies have various types of costs, and it is important to be able to distinguish between the different types when allocating them. 

We can break them down into a few different categories.

• Direct costs:  direct costs are those that can be traced to a certain product or service offered by a company. Included in direct costs are materials and labor that go into the production of a good. 
• Indirect costs :  these expenses are those that go into the production of a good but do not have a connection to a specific cost object. Examples of indirect costs include rent, utilities, and office supplies.
• Fixed costs : these costs remain constant, regardless of a company’s production volume. (e.g., rent)
• Variable costs : these costs increase or decrease as a company’s volume of production changes (e.g., supplies). 
• A few examples of fixed overhead costs include rent, insurance, and workers’ salaries. Variable overhead costs include supplies and energy expenses, which both change as the  volume of production  increases or decreases. 

How to Allocate Costs

Now that we understand the different types of costs, we can better understand the processes involved in cost allocation. Regardless of what good or service a company produces, the process remains consistent across industries. 

• Identify  Cost Objects : anything within a business that creates an expense is considered a cost object. The first step for allocating costs is to note all the cost objects of your company. 

Electricity usage

Water usage

Fuel consumption

• Fixed cost allocation:  this method assigns particular direct costs with cost objects. Drawing direct connections between costs and cost objects makes this method one of the most simple.
• Proportional allocation:  proportional allocation deals with the distribution of indirect costs across associated cost objects. Sometimes proportional allocation divides costs equally across cost objects, while other times, it considers other factors (i.e., size) and divides costs accordingly. 
• Activity-based allocation:  this method is commonly considered the more accurate method of allocating costs. Activity-based allocation utilizes precise documentation to determine costs within departments and allocates the costs appropriately. 

Why Do We Need to Allocate Costs?

A company must allocate its costs in order to optimize its business activities.

Recognizing Profits And Losses

Understanding the distribution of expenses helps companies analyze which areas of their business may be profitable or which areas may be causing a loss. This allows companies to determine whether or not certain expenses can be justified or not. 

Companies do not know how much to charge the customer’s goods and services without cost allocation. Once non-profitable cost objects are identified, companies can cut expenses in those departments and focus their efforts on profitable cost objects. 

Management Decisions

Cost allocation is also important for a company to manage its staff. In areas where the company is not profitable, it can evaluate the staff performance of that department. Often, the losses incurred by part of a company are due to the underperformance of employees. 

Similarly, companies can analyze the allocation of their costs to determine where they are profitable and award the employees of that department. 

Using cost allocation to motivate employees offers the administration of a company an objective, quantitative justification for their management decisions. 

Transfer Pricing

Transfer pricing is the practice of charging for goods and services at an arm's length. The practice is used by departments the organization to charge for the goods and services exchanged within the same firm.

Cost allocation is vital for deriving transfer pricing, the exchange price of goods or services between two companies. 

Examples of Cost Allocation & Calculations

Now we understand cost allocation, the different types, and why we need it. Here are several examples of different ways a company might allocate its costs. 

Example 1: Square Footage

Christina’s business has an office and a manufacturing space. The square footage of the office is 1,000 square feet, and the manufacturing space is 1,500 square feet. The rent for the two spaces is $10,000 per month. The company will allocate the rent expense between the two spaces. 

$10,000 (rent) / 2,500 square feet = $4 per square foot

• Calculate the rental cost for the office

$4 x 1,000 = $4,000

This means that Christina will allocate $4,000 of the rent to the office.

• Calculate the rental cost for the manufacturing space

$4 x 1,500 = $6,000

This means that Christina will allocate $6,000 of the rent to the manufacturing space.

Example 2: Units Produced

Alex’s manufacturing company makes water bottles. In January, Alex produced 5,000 water bottles with direct material costs of $2.50 per water bottle and $3.00 in direct labor costs per water bottle. 

Alex also had $6,500 in overhead costs in January. Using the number of units produced as his allocation method, Alex can calculate his overhead costs using the overhead cost formula. 

• Calculate the overhead costs: 

$6,500 / 5,000 = $1.30 per water bottle

• Add the overhead costs to the direct costs to find the total costs:

$1.30 + $2.50 + $3.00 = $6.80 per backpack

So, Alex’s total costs in January were $6.80 per backpack. If Alex had not allocated the overhead costs, he would have most likely underpriced the backpacks, which would have resulted in a loss of income. 

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Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

• Assets are resources that the company owns
• Liabilities are debts
• Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

• Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

• Record direct materials and direct labor for a job
• Record allocated manufacturing overhead
• Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

• Reading: Direct Costs
• Self Check: Direct Costs
• Reading: Allocated Overhead
• Self Check: Allocated Overhead
• Reading: Subsidiary Ledgers and Records
• Self Check: Subsidiary Ledgers and Records
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
• What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

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What Is Cost Allocation?

Cost Allocation Explained in Less Than 5 Minutes

Definition and Examples of Cost Allocation

How cost allocation works, types of cost allocation.

miodrag ignjatovic / Getty Images

Cost allocation is a method used to assign costs to cost objects for a specific department, project, program, or other area.

The methods for cost allocation involve simple calculations, which can be beneficial to small business owners who need accurate financial information to help them price their products or services and make overall decisions. Learning about these methods can help you get a handle on your expenses and positively affect your bottom line.

Cost allocation is a method used to assess the costs associated with cost objects in specific categories within a business. Cost objects might include a product or service you sell, a particular department within your company, or the costs of dealing with a supplier.

Cost allocation is not just for large corporations looking to reduce expenses. Small business owners can greatly benefit from cost allocation; you get a more detailed look into the actual costs associated with your business, which allows you to assess prices better and increase your profitability.

For example, you might want to determine the costs of dealing with one of your suppliers, so you’d add up all of the associated costs. These costs can include everything from the phone calls you make to the time spent dealing with issues caused by them. Additionally, you could count how much you pay for the supplies you get from them.

Cost allocation essentially works by assigning costs to smaller areas within the overall business so that you can view profits or losses at a more granular level. When you use cost allocation, you might discover that your true production cost per unit is higher than expected.

It’s important to remember that cost objects will vary depending on your business and industry.

That means you might consider increasing prices to maintain a specific profit margin . On the opposite end of the spectrum, you may decide to scrap a product that turned out to be a money pit.

To accurately calculate cost allocation, you must first identify the cost object, then begin to assess the actual cost.

Determining Costs

Spreading costs is not an exact science when it comes to cost objects. Some ways to allocate costs are based on units manufactured, square footage, number of hours, headcount, or usage.

Let’s say you have a building with a photography studio on the first floor and a salon on the second floor; you’ll use square footage as your cost object. The salon is 2,000 square feet, and the studio is 1,000 square feet. The total rent for the building is $6,000 per month. To allocate rent between the two spaces, you would first divide the total rent by the total square footage of the building:

$6,000 (overall rent) ÷ 3,000 sq. ft. (total space) = $2 per sq. ft.

Second, you’ll want to calculate the rent for the photography studio:

$2 (price per sq. ft.) x 1,000 (studio sq. ft.) = $2,000

Third, you can calculate the rent for the salon:

$2 (price per sq. ft.) x 2,000 (salon sq. ft.) = $4,000

Your rent per space should be $2,000 for the overhead expense of the studio and $4,000 for the overhead expense of the salon.

Other scenarios might include payroll cost allocation based on employee cost centers, or payment processing cost allocation based on transactions per location or franchise.

Cost objects can be just about anything you assign a cost to. Some examples of cost objects are jobs, payroll, departments, projects, financial systems, IT, and programs.

Cost allocation is based on different types of costs that fall into one of three categories, generally speaking.

Direct Costs

Direct costs are the easiest to assign to an identified cost object, because they are directly related. For example, a direct cost could be the labor required to produce a product or the materials used.

Indirect Costs

When you have an indirect cost, it is not attached to a specific cost object but still is necessary for the business to function. For example, common indirect costs could be security costs or administrative costs not related to a specific department.

Overhead Costs

Overhead costs—also called operating costs—are those costs associated with the day-to-day operations of your business. These accrue regardless of actual production, but still support productivity. Operating costs might include insurance, rent, and legal fees.

Costs can be fixed or variable depending on the type. A fixed cost is constant, while a variable cost can fluctuate depending on other factors.

The cost type factors into how you allocate the cost later. For example, if you were cost allocating rent, it would be allocated to overhead expenses. You would likely use the square-footage method to allocate the cost.

When allocating costs directly related to a product, you might use the units-produced allocation method to factor in overhead costs with the direct costs to create the product. This will allow you to determine better the price you should be asking.

Key Takeaways

• Cost allocation helps business owners identify areas of opportunity with their products or services.
• Cost objects can include anything you want to measure and assign a cost to, such as products, programs, projects, or even a customer.
• Ways to allocate costs include square footage, units produced, usage, and headcount.

Warren Averett. " Types of Cost Allocation Methods for Government Contractors ."

Municipal Research and Services Center of Washington. " Cost Allocation ."

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What is Cost Allocation? Definition & Process

Jul 16, 2020 Michael Whitmire

Working with the former accountants now working at FloQast, we decided to take a look at some of the pillars of the accounting professions.

The key to running a profitable enterprise of any kind is making sure that your prices are high enough to cover all your costs — and leave at least a bit for profit. For a really simple business — like the proverbial lemonade stand that almost every kid ran — that’s pretty simple. Your costs are what you (or your parents) paid for lemons and sugar. But what if it’s a more complex business? Then you might need to brush up on cost accounting, and learn about allocation accounting . Let’s walk through this using the hypothetical company, Lisa’s Luscious Lemonade. 

What is cost allocation ?

The cost allocation definition is best described as the process of assigning costs to the things that benefit from those costs or to cost centers . For Lisa’s Luscious Lemonade, a cost center can be as granular as each jug of lemonade that’s produced, or as broad as the manufacturing plant in Houston. 

Let’s assume that the owner, Lisa, needs to know the cost of a jug of lemonade. The total cost to create that jug of lemonade isn’t just the costs of the water, lemons, sugar and the jug itself, but also includes all the allocated costs to make it. 

Let’s start by defining some terms…

Direct costs are costs that can be traced directly to the product or service itself. For manufacturers, these consist of direct materials and direct labor. They appear in the financial statements as part of the cost of goods sold .

Direct materials are those that become an integral part of the finished product. This will be the costs of the water, sugar, lemons, the plastic jug, and the label. 

Direct labor includes the labor costs that can be easily traced to the production of those finished products. Direct labor for that jug will be the payroll for the workers on the production line. 

Indirect costs are the costs that can’t be easily traced to a product or service but are clearly required for making whatever an enterprise sells. This includes materials that are used in such insignificant quantities that it’s not worth tracing them to finished products, and labor for employees who work in the factory, but not on the production line. 

Overhead costs encompass all the costs that support the enterprise that can’t be directly linked to making the items that are sold. This includes indirect costs , as well as selling, marketing, administration, and facility costs. 

Manufacturing overhead includes the overhead costs that are directly related to making the products for sale. This includes the electricity, rent, and utilities for the factory and salaries of supervisors on the factory floor. 

Product costs are all the costs in making or acquiring the product for sale. These are also known as manufacturing costs or total costs . This includes direct labor, direct materials, and allocated manufacturing overhead. 

What is the process?

The first step in any cost allocation system is to identify the cost objects to which costs need to be allocated. Here, our cost objec t is a jug of lemonade. For a more complex organization, the cost object could be a product line, a department, or a branch. 

Direct costs are the simplest to allocate. Last month, Lisa’s Luscious Lemonades produced 50,000 gallons of lemonade and had the following direct costs:

                                    Total costs     Cost per gallon Direct materials        $142,500               $2.85 Direct labor                   $37,500                   $.75

How are costs allocated?

Allocating overhead costs is a bit more complex. First, the overhead costs are split between manufacturing costs and non-manufacturing costs. Some of this is pretty straightforward: the factory floor supervisor’s salary is clearly a manufacturing cost, and the sales manager’s salary is a non-manufacturing cost. But what about the cost of human resources or other service departments that serve all parts of the organization? Or facilities costs, which might include the rent for the building, insurance, utilities, janitorial services, and general building maintenance?

Human resources and other services costs might be logically split based on the headcount of the manufacturing versus non-manufacturing parts of the business. Facilities costs might be split based on the square footage of the manufacturing space versus the administrative offices. Electricity usage might be allocated on the basis of square footage or machine hours , depending on the situation. 

Let’s say that for Lisa’s Luscious Lemonades, after we split the overhead between manufacturing and non-manufacturing costs, we have the following annual manufacturing overhead costs : 

Supervisor salary                                  $84,000 Indirect costs                                         $95,000 Facility costs                                           $150,000 Human resources                                  $54,000 Depreciation                                          $65,000 Electricity                                                $74,000 Total manufacturing overhead             $522,000

In a perfect world, it would be possible to keep an accurate running total of all overhead costs so that management would have detailed and accurate cost information. However, in practice, a predetermined overhead rate is used to allocate overhead using an allocation base . 

This overhead rate is determined by dividing the total estimated manufacturing overhead by the estimated total units in the allocation base . At the end of the year or quarter, the allocated costs are reconciled to actual costs. 

Ideally, the allocation base should be a cost driver that causes those overhead costs . For manufacturers, direct labor hours or machine-hours are commonly used. Since Lisa only makes one product — gallon jugs of lemonade — the simplest cost driver is the number of jugs produced in a year. 

If we estimate that 600,000 gallons of lemonade are produced in a year, then the overhead rate will be $522,000 / 600,000 = $.87 per gallon.

Our final cost to produce a gallon of Lisa’s Luscious Lemonade is as follows:

Direct materials                             $2.85 Direct labor                                     $0.75 Manufacturing overhead               $0.87 Total cost                                         $4.47

What is cost allocation used for?

Cost allocation is used for both external reporting and internally for decision making. Under generally accepted accounting principles (GAAP), the matching principle requires that expenses be reported in the financial statements in the same period that the related revenue is earned. 

This means that manufacturing overhead costs cannot be expensed in the period incurred, but must be allocated to inventory items, where those costs remain until the inventory is sold, when overhead is finally expensed as part of the cost of goods sold. For Lisa’s Luscious Lemonade, that means that every time a jug of lemonade is produced, another $4.47 goes into inventory. When a jug is sold, $4.47 goes to the cost of goods sold. 

However, for internal decision-making, the cost allocation systems used for GAAP financials aren’t always helpful. Cost accountants often use activity-based costing , or ABC, in parallel with the cost allocation system used for external financial reporting . 

In ABC, products are assigned all of the overhead costs that they can reasonably be assumed to have caused. This may include some — but not all — of the manufacturing overhead costs , as well as operating expenses that aren’t typically assigned to products under the costing systems used for GAAP. 

AutoRec to keep you sane

Whatever cost accounting method you use, it’s going to require spreadsheets that you have to reconcile to the GL. Combine that with the other reconciliations you have to do to close out the books, and like Lisa’s controller, you might be ready to jump into a vat of lemonade to drown your sorrows. 

Enter FloQast AutoRec. Rather than spend hours every month reconciling accounts, AutoRec leverages AI to match one-to-one, one-to-many, or many-to-many transactions in minutes. Simple set up means you can start using it in minutes because you don’t need to create or maintain rules. Try it out, and see how much time you can save this month. 

Ready to find out more about how FloQast can help you tame the beast of the close?

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

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• Cost Classifications
• Relevant Cost of Material
• Manufacturing Overhead Costs
• Conversion Costs
• Quality Costs
• Revenue Expenditure
• Product Cost vs Period Cost
• Direct Costs and Indirect Costs
• Prime Costs and Conversion Costs
• Relevant vs Irrelevant Costs
• Avoidable and Unavoidable Costs
• Cost Allocation
• Joint Products
• Accounting for Joint Costs
• Service Department Cost Allocation
• Repeated Distribution Method
• Simultaneous Equation Method
• Specific Order of Closing Method
• Direct Allocation Method

Cost allocation is the process by which the indirect costs are distributed among different cost objects such as a project, a department, a branch, a customer, etc. It involves identifying the cost object, identifying and accumulating the costs that are incurred and assigning them to the cost object on some reasonable basis.

Cost allocation is important for both pricing and planning and control decisions. If costs are not accurately calculated, a business might never know which products are making money and which ones are losing money. If cost are mis-allocated, a business may be charging wrong price to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.

Cost allocation is a sub-process of cost assignment , which is the overall process of finding total cost of a cost object. Cost assignment involves both cost tracing and cost allocation. Cost tracing encompasses finding direct costs of a cost object while the cost allocation is concerned with indirect cost charge.

Steps in cost allocation process

Typical cost allocation mechanism involves:

• Identifying the object to which the costs have to be assigned,
• Accumulating the costs in different pools,
• Identifying the most appropriate basis/method for allocating the cost.

Cost object

A cost object is an item for which a business need to separately estimate cost.

Examples of cost object include a branch, a product line, a service line, a customer, a department, a brand, a project, etc.

A cost pool is the account head in which costs are accumulated for further assignment to cost objects.

Examples of cost pools include factory rent, insurance, machine maintenance cost, factory fuel, etc. Selection of cost pool depends on the cost allocation base used. For example if a company uses just one allocation base say direct labor hours, it might use a broad cost pool such as fixed manufacturing overheads. However, if it uses more specific cost allocation bases, for example labor hours, machine hours, etc. it might define narrower cost pools.

Cost driver

A cost driver is any variable that ‘drives’ some cost. If increase or decrease in a variable causes an increase or decrease is a cost that variable is a cost driver for that cost.

Examples of cost driver include:

• Number of payments processed can be a good cost driver for salaries of Accounts Payable section of accounting department,
• Number of purchase orders can be a good cost driver for cost of purchasing department,
• Number of invoices sent can be a good cost driver for cost of billing department,
• Number of units shipped can be a good cost driver for cost of distribution department, etc.

While direct costs are easily traced to cost objects, indirect costs are allocated using some systematic approach.

Cost allocation base

Cost allocation base is the variable that is used for allocating/assigning costs in different cost pools to different cost objects. A good cost allocation base is something which is an appropriate cost driver for a particular cost pool.

T2F is a university café owned an operated by a student. While it has plans for expansion it currently offers two products: (a) tea & coffee and (b) shakes. It employs 2 people: Mr. A, who looks after tea & coffee and Mr. B who prepares and serves shakes & desserts.

Its costs for the first quarter are as follows:

Total tea and coffee sales and shakes sales were $50,000 & $60,000 respectively. Number of customers who ordered tea or coffee were 10,000 while those ordering shakes were 8,000.

The owner is interested in finding out which product performed better.

Salaries of Mr. A & B and direct materials consumed are direct costs which do not need any allocation. They are traced directly to the products. The rest of the costs are indirect costs and need some basis for allocation.

Cost objects in this situation are the products: hot beverages (i.e. tea & coffee) & shakes. Cost pools include rent, electricity, music, internet and wi-fi subscription and magazines.

Appropriate cost drivers for the indirect costs are as follows:

Since number of customers is a good cost driver for almost all the costs, the costs can be accumulated together to form one cost pool called manufacturing overheads. This would simply the cost allocation.

Total manufacturing overheads for the first quarter are $19,700. Total number of customers who ordered either product are 18,000. This gives us a cost allocation base of $1.1 per customer ($19,700/18,000).

A detailed cost assignment is as follows:

Manufacturing overheads allocated to Tea & Cofee = $1.1×10,000

Manufacturing overheads allocated to Shakes = $1.1×8,000

by Irfanullah Jan, ACCA and last modified on Jul 22, 2020

Related Topics

• Cost Behavior

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Understanding Cost Objects – What They Are and Why They Matter

Businesses must clearly understand their costs as they strive to make informed financial decisions. One tool that companies use to track and manage their costs is cost objects.

But what exactly is a cost object, and how is it used in accounting and finance? In this blog post, we will explore the definition of cost objects, common types used in business and finance, and their role in cost accounting.

We will also answer frequently asked questions, including who assigns costs to cost objects and why we assign them. We will also discuss the challenges businesses may face when assigning costs and provide examples of cost objects used in the manufacturing industry.

Finally, we will explore techniques for allocating costs to cost objects and discuss how the size of a business can impact its use. By the end of this post, you will have a comprehensive understanding of cost objects and their importance in managing business finances.

What Is a Cost Object and How Is It Defined in Accounting and Finance? – Understanding Cost Objects

In accounting and finance, a cost object consumes resources or generates costs within a business or organization. It can be a product, service, project, department, customer, or any other entity that requires resources and generates costs.

A cost object can help identify the costs associated with producing a particular product or service, performing a specific activity, or serving a typical customer. This information can then be used to make more informed decisions about pricing, resource allocation, and process improvements .

For example, each bike would be a cost object in a manufacturing company that produces bicycles. The costs associated with producing each bicycle, such as materials, labor, and overhead expenses, would be tracked and assigned to that cost object.

This information can then be used to determine the true cost of each bicycle and make more informed decisions about pricing, production processes, and resource allocation.

In service-based businesses, cost objects can be more challenging to identify. For example, each project or client could be a cost object in a consulting firm. The costs associated with each project or client, such as labor and travel expenses, would be tracked and assigned to that cost object.

There are two types of cost objects: direct and indirect. Direct cost objects can be traced to a particular product, service, or activity. Indirect cost objects are not easily traced back to a particular product, service, or activity but consume resources and generate costs.

It is essential to accurately assign costs to cost objects to make more informed decisions about pricing, resource allocation, and process improvements. Failure to accurately assign costs to cost objects can lead to inaccurate pricing decisions, inefficient use of resources, and ultimately lower profits.

What Are Some Common Types of Cost Objects Used in Business and Finance? – Understanding Cost Objects

In business and finance, everyday cost objects are used to identify and track costs associated with producing goods or services, providing customer support, and managing operations. These cost objects help businesses understand the true costs of their activities and make informed decisions about pricing, resource allocation, and process improvements.

Output Cost – Types of Cost Objects Used in Business and Finance

One common type of cost object is the output cost. This refers to the cost of producing a good or providing a service that will be sold for a profit. It includes materials, labor, and overhead expenses directly associated with the production process. By accurately identifying and tracking output costs, businesses can determine the true cost of their products or services and make informed pricing decisions that maximize profits.

Operational Cost – Types of Cost Objects Used in Business and Finance

Another common type of cost object is operational cost. This includes departmental, functional, event, and customer-specific costs associated with managing and operating a business. 

For example, the operational cost of an event management company would include all expenses related to planning and executing events, such as venue rentals, catering, and marketing expenses. By tracking operational costs, businesses can identify areas where they can improve efficiency and reduce costs while maintaining a high service level.

Business Relationship Cost – Types of Cost Objects Used in Business and Finance

Business relationship costs are another type of cost object. These costs refer to the money spent promoting or maintaining relationships with customers, suppliers, and other business partners. 

For example, licensing fees, trade association dues, and customer freebies are all examples of business-related costs. These costs are significant because they help businesses establish and maintain strong relationships with their partners, which can lead to increased revenue and long-term success.

In addition to these types of cost objects, businesses may use many other objects to track costs and make informed decisions. 

For example, customer acquisition costs, which refer to acquiring new customers, can be useful for businesses looking to expand their customer base. Similarly, employee-related costs, such as salaries , benefits, and training expenses, can be tracked as a cost object to help businesses understand the true cost of their workforce.

What Is an Example of a Cost Object in Business? – Understanding Cost Objects

An example of a cost object in business could be a product line or a specific service. Let’s consider the scenario of a company that manufactures and sells three different types of smartphones – basic, mid-range, and premium. In this case, each product line is a cost object, and the company can track the costs associated with each line separately.

The company can identify and track the costs associated with each cost object to determine the cost of producing each smartphone model. For example, the cost of materials, labor, and overhead for producing each smartphone can be tracked separately for each product line .

This information can be used to make informed pricing decisions, as the company can determine the actual cost of each product and adjust the price accordingly to maximize profitability.

In addition to pricing decisions, cost objects can help identify areas where costs can be reduced or efficiency can be improved. For example, suppose the company identifies that the cost of producing the mid-range smartphone is higher than expected.

In that case, they can analyze the costs associated with that product line to identify areas where costs can be reduced. This may include identifying cheaper materials or streamlining the production process.

Another scenario where cost objects can be helpful is in customer profitability analysis. By tracking the costs associated with each customer, businesses can identify which customers are the most profitable and which are not. This information can be used to make informed decisions about customer acquisition and retention strategies.

Who Typically Assigns Costs to Cost Objects Within an Organization? – Understanding Cost Objects

In an organization, the process of assigning costs to cost objects is typically performed by various individuals or departments, depending on the size and complexity of the organization. The following list outlines some of the key stakeholders involved in the cost assignment process:

1. Management Accountants – Who Typically Assigns Costs to Cost Objects Within an Organization?

Management accountants are responsible for analyzing and reporting on the organization’s financial performance. They often play a key role in assigning costs to cost objects, as they deeply understand the organization’s financial systems and processes.

2. Production Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Production managers are responsible for overseeing the production process and ensuring that it runs smoothly and efficiently. They may assign costs to cost objects related to the production process, such as the cost of raw materials, labor, and equipment.

3. Sales and Marketing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Sales and marketing managers promote the organization’s products or services and generate revenue. They may assign costs to cost objects related to sales and marketing activities, such as advertising and promotions.

4. Purchasing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Purchasing managers are responsible for sourcing and procuring the materials and supplies needed for the organization’s operations. They may assign costs to cost objects related to the procurement process, such as raw materials and shipping costs.

5. IT Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

IT managers are responsible for overseeing the organization’s technology systems and infrastructure. They may assign costs to cost objects related to IT expenses, such as software licenses and hardware maintenance.

6. Human Resources Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Human resources managers are responsible for managing the organization’s workforce. They may assign costs to cost objects related to employee compensation, benefits, and training.

7. Financial Controllers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Financial controllers are responsible for managing the organization’s financial systems and processes. They may assign costs to cost objects related to overhead expenses, such as rent, utilities, and insurance.

8. Operations Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Operations managers are responsible for overseeing the day-to-day operations of the organization. They may assign costs to cost objects related to operational expenses, such as supplies and equipment maintenance.

In addition to these stakeholders, other individuals or departments may be involved in the cost assignment process, depending on the specific needs and requirements of the organization. For example, a large manufacturing company may have a dedicated cost accounting team responsible for assigning costs to cost objects and analyzing the organization’s financial performance.

How Are Cost Objects Used in Cost Accounting to Help Businesses Manage Their Costs? – Understanding Cost Objects

Cost accounting is a branch of accounting that focuses on measuring, analyzing, and reporting the costs associated with producing goods or providing services. 

One of the key concepts in cost accounting is the use of cost objects, which are specific items, products, or activities to which costs can be attributed. 

Cost objects are used to help businesses manage their costs in several ways, as outlined below:

1. Cost Control – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses control costs by identifying the specific items or activities driving their expenses. By assigning costs to specific cost objects, businesses can track their expenses more accurately and identify areas where they may be overspending. 

For example, a manufacturing company may use cost objects to track the costs of producing each product in its line. This can help them identify the most profitable products needing reevaluation or discontinued.

2. Cost Analysis – How Are Cost Objects Used in Cost Accounting

Cost objects also help businesses analyze costs and make informed decisions about managing them. By analyzing the costs associated with specific cost objects, companies can identify trends, patterns, and areas for improvement. 

For example, a service-based company may use cost objects to track the costs associated with each client or project. This can help them identify which clients or projects are the most profitable and which may cost them money.

3. Cost Planning – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses plan for their costs and make informed pricing, budgeting, and resource allocation decisions. 

By understanding the costs associated with specific cost objects, businesses can make more accurate projections about their future expenses and revenues. For example, a construction company may use cost objects to track the costs associated with each phase of a building project. This can help them create more accurate project estimates and avoid cost overruns.

4. Cost Reduction – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses reduce their costs by identifying areas where they may be able to streamline their operations or reduce waste. 

By analyzing the costs associated with specific cost objects, businesses can identify opportunities for cost reduction and implement strategies to improve their efficiency. For example, a retail store may use cost objects to track the costs associated with each product line. This can help them identify the most profitable products that may tie up valuable resources.

5. Cost Allocation – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses allocate their costs to the appropriate departments, products, or services. By assigning costs to specific cost objects, businesses can ensure that their expenses are accurately allocated and reported. 

This can help them make more informed decisions about resource allocation and pricing. For example, a hospital may use cost objects to track the costs associated with each patient. This can help them allocate costs to the appropriate departments and ensure their expenses are accurately reported to insurance providers and regulatory agencies.

When Would It Be Appropriate to Use a Project as a Cost Object? – Understanding Cost Objects

Using a project as a cost object can be appropriate in several situations, as outlined below:

1. Project Cost Control – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can control their costs more effectively by tracking the expenses associated with a specific project. 

This can help them identify areas where they may be overspending and take corrective action before it is too late. For example, a construction company may use a project as a cost object to track the costs associated with building a new office building. This can help them monitor their expenses and ensure they stay within budget.

2. Project Cost Analysis – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can also help businesses analyze their costs and make informed decisions about future projects. 

By analyzing the costs associated with a specific project, businesses can identify areas to reduce costs or improve their efficiency. For example, a software development company may use a project as a cost object to track the costs of developing a new app. This can help them identify areas where they may be able to streamline their development process and reduce costs.

3. Project Cost Planning – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses plan for their costs more effectively by providing a detailed breakdown of the expenses associated with a specific project. 

This can help businesses make more accurate projections about their expenses and revenues. For example, a marketing agency may use a project as a cost object to track the costs associated with developing a new advertising campaign. This can help them create more accurate project estimates and avoid cost overruns.

4. Project Cost Reduction – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can identify areas where they may be able to reduce costs and improve their efficiency. This can help them achieve their goals more effectively and with fewer resources. 

For example, a manufacturing company may use a project as a cost object to track the costs associated with developing a new product line. This can help them identify areas where they may be able to reduce costs and improve their manufacturing processes.

5. Project Cost Allocation – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses allocate their costs more accurately to the appropriate departments or products. By tracking the expenses associated with a specific project, businesses can ensure that their costs are allocated correctly and reported accurately. 

For example, a consulting firm may use a project as a cost object to tracking the costs associated with a specific client engagement. This can help them allocate costs to the appropriate departments and ensure that their expenses are accurately reported.

Who Benefits the Most From Using Cost Objects to Track Expenses in a Business?

Below are some of the stakeholders that can benefit the most from using cost objects to track expenses in a business:

1. Management – Who Benefits the Most From Using Cost Objects?

One of the primary beneficiaries of using cost objects to track expenses is management. By better understanding where money is spent within a company, management can make more informed decisions about where to allocate resources, which projects to pursue, and which expenses to cut. Cost objects can also help management identify areas where efficiency and costs can be improved.

2. Accountants – Who Benefits the Most From Using Cost Objects?

Accountants also benefit from using cost objects to track expenses in a business. Cost objects provide a more accurate picture of where money is being spent, which helps accountants create more accurate financial statements. This can help them comply with financial reporting requirements, such as GAAP or IFRS, and provide stakeholders with a clear view of the company’s financial health.

3. Sales and Marketing – Who Benefits the Most From Using Cost Objects?

Sales and marketing teams can benefit from using cost objects to track expenses by understanding the cost of acquiring new customers or generating new leads. Using cost objects, they can see how much money is spent on specific campaigns or initiatives and make informed decisions about where to invest their resources.

4. Operations – Who Benefits the Most From Using Cost Objects?

Operations teams can benefit from using cost objects to track expenses by identifying areas where efficiency can be improved. By understanding the cost of specific processes or activities, operations teams can find ways to streamline operations and reduce costs.

5. Investors – Who Benefits the Most From Using Cost Objects?

Investors can benefit from using cost objects to track expenses in a business by having a better understanding of how the company is using its resources. This can help them make informed decisions about whether or not to invest in a company and can provide insight into the company’s long-term financial health.

6. Customers – Who Benefits the Most From Using Cost Objects?

While not traditional stakeholders, customers can indirectly benefit from using cost objects to track expenses in a business. By better understanding where money is being spent, companies can potentially reduce their costs and offer products or services at a lower price point. This can ultimately benefit customers by providing them with more affordable options.

What Are Some Challenges Businesses May Face When Assigning Costs to Cost Objects? – Understanding Cost Objects

Assigning costs to cost objects can be challenging for businesses, mainly when numerous cost objects are involved or when the costs are not easily attributable to a specific object. Below are some of the common challenges businesses may face when assigning costs to cost objects:

1. Identifying Cost Objects – Challenges Businesses May Face

One of the biggest challenges businesses face when assigning costs to cost objects is identifying the appropriate cost objects. It can be challenging to determine which costs should be assigned to which cost objects, mainly if many cost objects are involved or if the costs are not easily attributable to a specific object.

2. Allocating Indirect Costs – Challenges Businesses May Face

Another challenge businesses face when assigning costs to cost objects is allocating indirect costs. Indirect costs, such as overhead or administrative expenses, can be difficult to allocate to specific cost objects. Businesses may need to use allocation methods, such as activity-based costing, to allocate indirect costs to cost objects.

3. Choosing the Right Allocation Method – Challenges Businesses May Face

Businesses may face challenges in choosing the right allocation method when assigning costs to cost objects. Several different allocation methods are available, each with advantages and disadvantages. Choosing the correct method can be challenging and may require careful consideration of the specific circumstances and goals of the business.

4. Ensuring Accuracy – Challenges Businesses May Face

Assigning costs to cost objects requires accuracy to ensure the resulting data is reliable and valuable. However, achieving accuracy can be difficult, mainly if the data is incomplete or inaccurate. Businesses may need to implement procedures to ensure data accuracy in cost allocation.

5. Updating Cost Object Data – Challenges Businesses May Face

Cost objects may change over time, challenging businesses when assigning costs. For example, if a product line is discontinued, the costs associated with that product line may need to be allocated to a different cost object. Businesses must ensure that they regularly update cost object data to reflect changes in the industry.

6. Ensuring Consistency – Challenges Businesses May Face

Consistency in cost allocation is important to ensure the resulting data is comparable over time. However, achieving consistency can be challenging, mainly if the business uses different allocation methods or cost objects over time. Companies may need to implement procedures to ensure that cost allocation is consistent over time.

7. Dealing with Complexity – Challenges Businesses May Face

Some businesses may have complex operations, making assigning costs to cost objects challenging. For example, assigning costs to cost objects can become complex if a business operates in multiple locations or has multiple product lines. Businesses may need sophisticated cost allocation methods or software to handle this complexity.

When Should a Business Consider Creating a New Cost Object? – Understanding Cost Objects

There may be situations where a business needs to create a new cost object to manage costs better. 

Below are some scenarios where a business should consider creating a new cost object:

1. Introducing a New Product or Service – When Should a Business Consider Creating a New Cost Object?

When a business introduces a new product or service, creating a new cost object may be appropriate to track the costs associated with that product or service. This can help the business to determine the profitability of the new offering and to identify opportunities to reduce costs.

2. Expanding into a New Market or Region – When Should a Business Consider Creating a New Cost Object?

If a business expands into a new market or region, it may need to create a new cost object to track the costs associated with that market or region. This can help the business determine whether the expansion is profitable and identify opportunities to reduce costs in the new market or region.

3. Undertaking a Large Project – When Should a Business Consider Creating a New Cost Object?

When a business undertakes a large project, such as building a new factory or launching a new marketing campaign, it may be appropriate to create a new cost object to track the costs associated with the project. This can help the business determine the project’s total cost and identify opportunities to reduce costs.

4. Tracking Costs for a Specific Customer – When Should a Business Consider Creating a New Cost Object?

Sometimes, a business may want to track costs associated with a specific customer, particularly if that customer represents a significant portion of the business’s revenue. Creating a new cost object for the customer can help the business determine the customer’s profitability and identify opportunities to reduce costs associated with serving that customer.

5. Managing Costs for a Specific Department – When Should a Business Consider Creating a New Cost Object?

Suppose a business wants to track costs associated with a specific department, such as human resources or IT. In that case, creating a new cost object for that department may be appropriate. This can help the business determine the department’s total cost and identify opportunities to reduce costs.

6. Reorganizing the Business – When Should a Business Consider Creating a New Cost Object?

Suppose a business undergoes a significant reorganization, such as merging with another company or restructuring its operations. In that case, it may be appropriate to create new cost objects to reflect the new organizational structure. This can help the business to track costs associated with the new structure and to identify opportunities to reduce costs.

What Are Some Examples of Cost Objects Used in the Manufacturing Industry? – Understanding Cost Objects

In the manufacturing industry, cost objects are crucial in determining the cost of producing goods. Cost objects track and allocate costs to specific products, departments, or activities. This helps manufacturers understand the true cost of production and make informed decisions to improve profitability. Some common examples of cost objects used in the manufacturing industry include:

1. Products – Examples of Cost Objects Used in the Manufacturing Industry

Producing a specific product is an everyday cost object in manufacturing. By tracking the cost of materials, labor, and overhead associated with producing a product, manufacturers can determine the profitability of each product and make informed decisions about pricing, production volumes, and product mix.

2. Production Processes – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can also be used to track the cost of specific production processes, such as assembly, machining, or testing. By understanding the cost of each process, manufacturers can identify inefficiencies, reduce waste, and optimize production to improve profitability.

3. Departments – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of individual departments within a manufacturing facility, such as production, engineering, or quality control. By understanding the cost of each department, manufacturers can identify opportunities to reduce costs and improve efficiency.

4. Suppliers – Examples of Cost Objects Used in the Manufacturing Industry

Manufacturers can also use cost objects to track the cost of materials and services specific suppliers provide. By understanding the cost of each supplier, manufacturers can negotiate better pricing, improve supplier relationships, and reduce supply chain risks.

5. Equipment – Examples of Cost Objects Used in the Manufacturing Industry

Operating and maintaining specific equipment costs can be tracked using cost objects. By understanding the cost of each piece of equipment, manufacturers can identify opportunities to improve equipment efficiency, reduce downtime, and optimize maintenance schedules.

6. Customers – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of serving specific customers. By understanding the cost of each customer, manufacturers can identify which customers are profitable and which are not and make informed decisions about pricing, sales, and marketing.

7. Projects – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of specific projects, such as new product development, process improvement, or facility upgrades. By understanding the cost of each project, manufacturers can make informed decisions about project prioritization, resource allocation, and project management.

What Are Some Techniques Used to Allocate Costs to Cost Objects? – Understanding Cost Objects

There are several techniques used to allocate costs to cost objects, including:

1. Direct Allocation – Techniques Used to Allocate Costs to Cost Objects

Direct allocation is the simplest method, assigning costs directly to a specific cost object. For example, the cost of raw materials used in a product can be assigned directly to that product.

2. Activity-Based Costing (ABC) – Techniques Used to Allocate Costs to Cost Objects

ABC is a more sophisticated method of cost allocation that assigns costs to cost objects based on the activities that drive those costs. 

ABC involves identifying all the activities involved in producing a product or service and assigning the costs associated with each activity to the cost object. This method is proper when products or services require different activity levels and when traditional allocation methods may not accurately reflect the cost drivers.

3. Job Order Costing – Techniques Used to Allocate Costs to Cost Objects

Job order costing is a cost allocation method used in manufacturing companies that produce custom or unique products. With job order costing, costs are assigned to a specific job or order rather than a product or service. For example, a custom furniture manufacturer might use job order costing to track the costs of producing a specific piece of furniture.

4. Process Costing – Techniques Used to Allocate Costs to Cost Objects

Process costing is a cost allocation method used in manufacturing companies that produce large quantities of identical products. It assigns costs to a specific production process rather than a product or service. For example, a cereal manufacturer might use process costing to track the costs associated with producing a certain type of cereal.

5. Standard Costing – Techniques Used to Allocate Costs to Cost Objects

Standard costing is a method of allocation that assigns costs to cost objects based on predetermined standards or estimates. This method is often used in manufacturing companies that produce large quantities of identical products. Standard costing assigns costs based on the estimated cost of producing a single product unit .

6. Variable Costing – Techniques Used to Allocate Costs to Cost Objects

Variable costing is a method of allocation that assigns only variable costs to a specific cost object, such as direct materials, direct labor, and variable overhead. 

Fixed costs are not assigned to a specific cost object but are treated as period expenses. This method is proper when analyzing the profitability of particular products or services, as it provides a more accurate picture of the variable costs associated with production.

How Does the Size of a Business Impact the Use of Cost Objects? – Understanding Cost Objects

The size of a business can impact the use of cost objects in several ways.

Firstly, smaller businesses may have fewer cost objects than larger firms, as they may have a simpler organizational structure and product/service offerings. This can make it easier for them to assign and track costs, as there are fewer cost objects to manage.

On the other hand, larger businesses may have a more complex organizational structure, with multiple departments and product/service offerings. This can result in more cost objects, making assigning and tracking costs more challenging. However, larger businesses may also have more resources and specialized personnel to manage and allocate costs to cost objects.

Secondly, the size of a business can impact the level of detail in cost tracking. Smaller companies may not require as detailed cost tracking as larger businesses, as they may have fewer transactions and expenses to manage. For example, a small retail business may only need to track costs at a high level for each product category, while a large retail chain may need to track costs for each product SKU.

Thirdly, the size of a business can impact the choice of cost allocation methods. Smaller companies may have more flexibility in choosing a cost allocation method, as they may have a more straightforward cost structure . Larger businesses, on the other hand, may need to use more complex cost allocation methods to assign costs to each cost object accurately.

How Can Businesses Stay Up-to-Date With Best Practices for Using Cost Objects in Accounting and Finance? – Understanding Cost Objects

To stay up-to-date with best practices for using cost objects in accounting and finance, businesses can take several steps:

1. Attend Industry Conferences And Seminars – Staying Up-to-Date With Best Practices

Attending conferences and seminars related to accounting and finance can provide businesses with the latest updates and best practices in cost object management. These events are also an excellent opportunity to network with other professionals in the field.

2. Read Industry Publications – Staying Up-to-Date With Best Practices

Keeping up-to-date with industry publications, such as accounting and finance journals, can provide businesses with valuable insights and best practices for using cost objects. Subscribing to newsletters and following industry influencers on social media can also provide helpful information.

3. Engage With Professional Associations – Staying Up-to-Date With Best Practices

Professional associations, such as the American Institute of Certified Public Accountants (AICPA), offer accounting and finance professionals training and resources. Engaging with these organizations can provide businesses access to the latest updates and best practices in cost object management.

4. Utilize Technology – Staying Up-to-Date With Best Practices

Advances in technology have made it easier for businesses to manage their costs and allocate them to cost objects. Cost accounting software can give businesses real-time data and analytics to make informed business decisions.

5. Work With A Professional Accountant – Staying Up-to-Date With Best Practices

Working with a professional accountant can guide businesses on best practices for using cost objects. An experienced accountant can also help businesses identify areas for improvement and implement effective cost-management strategies.

Conclusion – Understanding Cost Objects

In conclusion, understanding cost objects is a crucial aspect of cost accounting and finance for any business. It allows for effective cost management and decision-making, enabling companies to accurately track expenses and allocate costs to the appropriate sources.

By identifying and assigning costs to cost objects, businesses can gain insights into their operations, identify areas for improvement, and optimize their financial performance. However, it is essential to consider the challenges that may arise when assigning costs to cost objects and to review and update the allocation methods used regularly.

With the right techniques and best practices, businesses of all sizes can benefit from using cost objects in their accounting and finance practices. By staying up-to-date with the latest trends and practices in cost accounting, companies can ensure that they make informed decisions and maximize their profitability.

Recommended Readings – Conclusion

• Understanding Absorption Costing and Improving Absorption Rate
• Cost of Goods Sold COGS- Defined & Explained (With Examples)
• Opportunity Cost- Defined & Explained (With Examples)

Frequently Asked Questions – Understanding Cost Objects

1. what is the main purpose of the cost object – faqs.

The primary purpose of a cost object is to enable a business to identify and track the costs associated with a specific item, product, service, or activity.

By assigning costs to cost objects, businesses can analyze and manage their expenses more effectively, make informed decisions, and improve profitability. Cost objects provide businesses with a way to allocate costs accurately and fairly and help them understand the financial impact of each cost element on their overall operations.

For example, a manufacturing company might assign costs to each unit of a particular product to determine its profitability, or a service-based business might give costs to specific clients to better understand the profitability of each customer relationship. 

2. Why Do We Assign Cost to Cost Objects? – FAQs

We assign costs to cost objects for several reasons. The primary reason is to track the costs associated with producing a product, providing a service, or engaging in an activity. By assigning costs to specific cost objects, we can accurately measure the expenses that go into producing each unit or providing each service. This allows us to calculate profitability, set prices, and make informed decisions about our business operations.

Another reason we assign costs to cost objects is to allocate expenses fairly and accurately across different departments, products, or services. This helps us understand which areas of our business are the most profitable and where we need to make adjustments to improve performance. By allocating costs to cost objects, we can ensure that each business area is responsible for its expenses and that costs are shared fairly across the organization.

Finally, assigning costs to cost objects allows us to comply with accounting and financial reporting standards. For example, businesses must report their expenses in financial statements, and assigning costs to cost objects helps ensure that these reports accurately reflect the expenses associated with each product or service. This is important for regulatory compliance and providing investors and other stakeholders with accurate financial information.

Updated:5/18/202

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2.4: Process Costing (Weighted Average)

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Process Costing consists of the following steps:

• Physical flow of units
• Equivalent Units of Production
• Cost per Equivalent Unit
• Assign Costs to Units completed and Ending work in process inventory
• Reconcile Costs

Keep in mind, there are no Generally Accepted Accounting Principles (GAAP) that mandate how we must do a process cost report. We will focus on the calculations involved and show you an example of a process cost summary report but know there are several ways to present the information, but the calculations are all the same.

In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method. We will continue the discussion under the weighted average method and calculate a cost per equivalent unit.

Step 3: Cost per Equivalent Unit

The formula we will use is notice we are primarily using the dollar costs and not units for this section (except we will use TOTAL equivalent units we calculated in the previous section):

We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead).

A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/ma/?p=74

Example – Jax Company

To continue with our previous example, we were given the following information:

We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion.

To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units.

In this example, beginning work in process is zero. This will not always be the case. The problem will provide the information related to beginning work in process inventory costs and units.

Step 4: Assign Costs

In this next section, we will combine the equivalent units (from step 2) and the cost per equivalent units (step 3) to assign costs to units completed and transferred out (also called cost of goods manufactured) and costs of units remaining ending work in process inventory. The basic formula to assign costs is:

Using the example company, Jax Company, we have the following information:

We would assign costs as follows:

For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending work in process .

Step 5: Cost Reconciliation

Finally, we can check our work. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory.

First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. Both totals should agree.

For Jax Company, the cost reconciliation would be:

The full process cost report can be found by clicking Jax_process cost ).

Contributors and Attributions

• Accounting Principles: A Business Perspective.. Authored by : James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University.. Provided by : Endeavour International Corporation. Project : The Global Text Project.. License : CC BY: Attribution
• Cost Per Equivalent Unit (weighted average method) . Authored by : Education Unlocked. Located at : https://youtu.be/Txv05196CWs . License : All Rights Reserved . License Terms : Standard YouTube License

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What Is Cost Accounting?

Understanding cost accounting.

• Cost vs. Financial Accounting
• Cost Accounting FAQs

The Bottom Line

• Corporate Finance

Cost Accounting: Definition and Types With Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant , and can only be used for internal purposes.

Key Takeaways

• Cost accounting is used internally by management in order to make fully informed business decisions.
• Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of management.
• As such, cost accounting cannot be used on official financial statements and is not GAAP-compliant.
• Cost accounting considers all input costs associated with production, including both variable and fixed costs.
• Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

Investopedia / Theresa Chiechi

Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting , each performing its own function for the accountant.

Types of Costs

• Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
• Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up its floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
• Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
• Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
• Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

Cost Accounting vs. Financial Accounting

While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements , which include information about its revenues , expenses , assets , and liabilities . Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.

One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as  generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.

Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company's true costs. 

Types of Cost Accounting

Standard costing.

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and the actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which refer to any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers , and they are the measures used as the basis for allocating overhead costs .

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line employees who will then account for the amount of time they spend on different tasks. The costs of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly the time and money are being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor-intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing  and lean-focused performance measurements. Financial decision-making is based on the impact on the company's total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The  break-even point —which is the production level where total revenue for a product equals total expense —is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin , calculated as the sales revenue minus variable costs, can also be calculated on a per-unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.

History of Cost Accounting

Scholars believe that cost accounting was first developed during the  industrial revolution  when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature on business management.

How Does Cost Accounting Differ From Traditional Accounting Methods?

In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement  cost controls . Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.

Why Is Cost Accounting Used?

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.

Which Types of Costs Go Into Cost Accounting?

These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.

What Are Some Advantages of Cost Accounting?

Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the  Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.

What Are Some Drawbacks of Cost Accounting?

Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled  accountants  and  auditors  are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.

Cost accounting is an informal set of flexible tools that a company's managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. These are meant to be internal metrics and figures only. Since they are not GAAP-compliant, cost accounting cannot be used for a company's audited financial statements released to the public.

Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review , vol. 46, no. 3, 1993, pp. 503-517.

• Accounting Explained With Brief History and Modern Job Requirements 1 of 51
• What Is the Accounting Equation, and How Do You Calculate It? 2 of 51
• What Is an Asset? Definition, Types, and Examples 3 of 51
• Liability: Definition, Types, Example, and Assets vs. Liabilities 4 of 51
• Equity Meaning: How It Works and How to Calculate It 5 of 51
• Revenue Definition, Formula, Calculation, and Examples 6 of 51
• Expense: Definition, Types, and How Expenses Are Recorded 7 of 51
• Current Assets vs. Noncurrent Assets: What's the Difference? 8 of 51
• What Is Accounting Theory in Financial Reporting? 9 of 51
• Accounting Principles Explained: How They Work, GAAP, IFRS 10 of 51
• Accounting Standard Definition: How It Works 11 of 51
• Accounting Convention: Definition, Methods, and Applications 12 of 51
• What Are Accounting Policies and How Are They Used? With Examples 13 of 51
• How Are Principles-Based and Rules-Based Accounting Different? 14 of 51
• What Are Accounting Methods? Definition, Types, and Example 15 of 51
• What Is Accrual Accounting, and How Does It Work? 16 of 51
• Cash Accounting Definition, Example & Limitations 17 of 51
• Accrual Accounting vs. Cash Basis Accounting: What's the Difference? 18 of 51
• Financial Accounting Standards Board (FASB): Definition and How It Works 19 of 51
• Generally Accepted Accounting Principles (GAAP): Definition, Standards and Rules 20 of 51
• What Are International Financial Reporting Standards (IFRS)? 21 of 51
• IFRS vs. GAAP: What's the Difference? 22 of 51
• How Does US Accounting Differ From International Accounting? 23 of 51
• Cash Flow Statement: What It Is and Examples 24 of 51
• Breaking Down The Balance Sheet 25 of 51
• Income Statement: How to Read and Use It 26 of 51
• What Does an Accountant Do? 27 of 51
• Financial Accounting Meaning, Principles, and Why It Matters 28 of 51
• How Does Financial Accounting Help Decision-Making? 29 of 51
• Corporate Finance Definition and Activities 30 of 51
• How Financial Accounting Differs From Managerial Accounting 31 of 51
• Cost Accounting: Definition and Types With Examples 32 of 51
• Certified Public Accountant: What the CPA Credential Means 33 of 51
• What Is a Chartered Accountant (CA) and What Do They Do? 34 of 51
• Accountant vs. Financial Planner: What's the Difference? 35 of 51
• Auditor: What It Is, 4 Types, and Qualifications 36 of 51
• Audit: What It Means in Finance and Accounting, and 3 Main Types 37 of 51
• Tax Accounting: Definition, Types, vs. Financial Accounting 38 of 51
• Forensic Accounting: What It Is, How It's Used 39 of 51
• Chart of Accounts (COA) Definition, How It Works, and Example 40 of 51
• What Is a Journal in Accounting, Investing, and Trading? 41 of 51
• Double Entry: What It Means in Accounting and How It's Used 42 of 51
• Debit: Definition and Relationship to Credit 43 of 51
• Credit: What It Is and How It Works 44 of 51
• Closing Entry 45 of 51
• What Is an Invoice? It's Parts and Why They Are Important 46 of 51
• 6 Components of an Accounting Information System (AIS) 47 of 51
• Inventory Accounting: Definition, How It Works, Advantages 48 of 51
• Last In, First Out (LIFO): The Inventory Cost Method Explained 49 of 51
• The FIFO Method: First In, First Out 50 of 51
• Average Cost Method: Definition and Formula with Example 51 of 51

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Business process delegation updates for finance and human resources.

Beginning on Friday, May 24 , delegation will be enabled on several Workday business processes. Prior to this change, delegation was only enabled on time tracking and financial business processes.  These changes will make the functionality available to human resources business processes. 

  If you have a step in the process, you will be able to use the "Request Delegation" task to temporarily delegate your work to an appropriate individual because you will be out of the office or otherwise unavailable to complete or approve transactions in Workday. Delegation will be available for the business processes listed below.

• Add Additional Job  
• Assign Costing Allocation (Cost Center Manager was added with the position control project)   
• Change Job  
• Change Organization Assignments for Worker  
• Create Payroll Accounting Adjustments  
• Edit Position 
• Edit Position Restrictions  
• Job Requisition  
• Period Activity Pay  
• Request Compensation Change   
• Request One-Time Payment 

This expanded functionality offers the benefits of (1) a formalized process for assigning work to appropriate and responsible parties when planning time away and (2) assurance that your time-sensitive tasks have been appropriately delegated and can be managed in your absence, thereby providing peace of mind while away.

  Delegation requests should be for 30 days or less unless there are extenuating circumstances (e.g., employee on a leave of absence) that may require up to 180 days of delegation. Refer to the  delegation job aid  in the Administrative Resource Center for more information. Additionally, an enhancement was made to include the worker job profile on the "Delegations History - OSU" (Tableau Report). Please make sure to monitor the report monthly to ensure delegations are appropriate.