what is the meaning cost assignment

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?

Table of Contents

For your business to make money, you must charge prices that not only cover your expenses, but also provide a profit. Cost allocation is the process of identifying and assigning costs to the cost objects in your business, such as products, a project, or even an entire department or individual company branch.

While a detailed cost allocation report may not be vital for extremely small businesses, such as a teen’s lawn service, more complex businesses require the process of cost allocation to ensure profitability and productivity.

In short, if you can assign a cost to any part of your business, it’s considered a cost object.

What is cost allocation?

Cost allocation is the method business owners use to calculate profitability for the purpose of financial reporting . To ensure the business’s finances are on track, costs are separated, or allocated, into different categories based on the area of the business they impact.

For instance, cost allocation for a small clothing boutique would include the costs of materials, shipping and marketing. Calculating these costs consistently would help the store owner ensure that profits from sales are higher than the costs of owning and running the store. If not, the owner could easily pinpoint where to raise prices or cut expenses .

For a larger company, this process would be applied to each department or individual location. Many companies use cost allocation to determine which areas receive bonuses annually.

Regardless of your business size, you’ll want to review and choose the best accounting software to help this process run as smoothly as possible.

Types of costs

In the boutique example above, the process of cost allocation is pretty simple. For larger businesses, however, many more costs are involved. These costs break down into seven categories.

• Direct costs: These expenses are directly related to a product or service. In your business’s financial statements, these costs can be linked to items sold. For a small clothing store, this might include the cost of inventory.
• Direct labor: This cost category includes expenses directly related to the employee production of items or services your business sells. Direct labor costs include payroll for employees involved in making the items your business sells.
• Direct materials: As the name suggests, this category includes costs related to the resources used to manufacture a finished product. Direct materials include fabric to make clothing, or the glass used in building tables.
• Indirect costs: These expenses are not directly related to a product or service, but necessary to create the product or service. Indirect costs include payroll for those who work in operations. It also lists costs for materials you use in such small quantities that their costs are easy to overlook.
• Manufacturing overhead: This category includes warehouse costs, and any other expenses directly related to manufacturing the products sold. Manufacturing overhead costs include payroll for warehouse managers, as well as warehouse expenses such as rent and utilities.
• Overhead costs: These include expenses that support the company as a whole but are not directly related to production. Some examples of overhead costs are marketing, operations and utilities for a storefront.
• Product costs: Also called “manufacturing costs” or “total costs,” this category includes expenses for making or acquiring the product you sell. All manufacturing overhead costs are also listed in this category.

Example of cost allocation

To better explain the process of cost allocation and why it’s necessary for businesses, let’s look at an example.

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:

Overhead: $5,000 ÷ $3,000 = $1.66 per pair

Direct costs:

• Direct materials: $5 per pair
• Direct labor: $2 per pair
• Overhead: $1.66 per pair
• Total cost: $8.66 per pair

As you can see, without cost allocation, Dave would not have made a profit from his sales. Larger companies would apply this same process to each department and product to ensure sufficient sales goals. [Read related article: How to Set Achievable Business Goals ]

How to allocate costs

Cost objects vary by business type. The cost allocation process, however, consists of the same steps regardless of what your company produces.

1. Identify cost objects.

To begin allocating costs, you’ll need to list the cost objects of your business. 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.

2. Create a cost pool.

Next, gather a detailed list of all business costs. It’s a good idea to categorize the costs based on the reason for each amount. Categories should cover utilities, insurance , square footage and any other expenses your business incurs.

3. Allocate costs.

Now that you’ve listed cost objects and created a cost pool, you’re ready to allocate costs. As demonstrated in the example above, add up the costs of each cost object. At a glance, your report should justify all expenses related to your business. If costs don’t add up correctly, use the list to determine where you can make adjustments to get back on track.

What is cost allocation used for?

Cost allocation is used for many reasons, both externally and internally. Reports created by this process are great resources for making business decisions , monitoring productivity and justifying expenses.

External reports are usually calculated based on generally accepted accounting principles (GAAP) . Under GAAP, expenses can only be reported in financial statements during the time period the associated revenue is earned. For this reason, overhead costs are divided and allocated to individual inventory items. When the inventory is sold, the overhead is expensed as a portion of the cost of goods sold (COGS) .

Internal financial data, on the other hand, is usually reported using activity-based costing (ABC). This method assigns all products to the overhead expenses they caused. This process may not include all overhead costs related to operations and manufacturing.

Cost allocation reports show which cost objects incur the most expenses for your business and which products or departments are most profitable. These findings can be a great resource to pair with employee monitoring software when evaluating productivity. If you determine that a cost object is not as profitable as it should be, you should do further evaluations on productivity. If another cost object is found to exceed expectations, you can use the report to find staff members who deserve recognition for their contributions to the company.

Recognition is one of the best ways to keep employees motivated .

What is a cost driver?

A cost driver is a variable that can change the costs related to a business activity. The number of invoices issued, the number of employee hours worked, and the total of purchase orders are all examples of cost drivers in cost accounting .

While cost objects are related to the specific process or product incurring the costs, a cost driver sheds light on the reason for the incurred cost amounts. These items can take different forms – including fixed costs, such as the initial fees during the startup phase . Cost drivers give a bird’s-eye view of the entire company and how each department operates.

It’s common for only one cost driver to be used with very small businesses , since they are focused on using minimal reporting to estimate overhead costs.

Benefits of cost allocation

• It simplifies decision-making. Cost allocation gives you 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.
• It assists in staff evaluation. You can also use cost allocation to assess the performance of different departments. If a department is not profitable, the staff productivity may need improvement. Cost allocation can also be an indicator of departments that exceed expectations and deserve recognition. Awards and recognition are a great way to motivate staff and, in turn, increase productivity. [Read related article: Best Business Productivity Apps ]

Even if you operate a very small business, it’s a great idea to learn the process of cost allocation, especially if you anticipate expansion in the future. Since the method can be complex, it’s ideal to use accounting software as an aid. Whether you choose to start allocating costs on your own with software or hire a professional accountant , it’s a process no business owner can afford to overlook.

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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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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
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COST ASSIGNMENT Definition

COST ASSIGNMENT involves assigning costs of an account to the accounts that are responsible or accountable for incurring the cost. For example, the cost of issuing purchase orders is allocated to the various objects procured. The cost assignment is done through assignment paths and cost drivers. The assignment path identifies the source account (the account whose cost is being assigned "Issue Purchase Orders" in the above example) and destination accounts (the accounts to which the costs are being allocated the various cost objects procured by issuing purchase orders in the above example). The cost driver identifies the measure or rationale on the basis of which the assignment needs to be done, that is, whether the costs of issuing purchase orders need to be assigned to various cost objects evenly, based on some defined percentage values, or based on some criterion, like the number of purchase orders of each cost object issued. Defining the cost drivers and assignment paths (i.e., source and destination accounts) enable proper assignment and accounting of the various costs incurred in the organization.

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AMORTIZATION 1. is the gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity. When the debt involves real property, often the periodic payments include a sum sufficient to pay taxes and hazard insurance on the property. 2. is the process of spreading the cost of an intangible asset over the expected useful life of the asset. For example: a company pays $100,000 for a patent, they amortize the cost over the 16 year useful life of the patent. 3. the deduction of capital expenses over a specific period of time. Similar to depreciation, it is a method of measuring the "consumption" of the value of long-term assets like equipment or buildings.

MONEY MARKET is a sector of the capital market where short-term obligations such as Treasury bills, commercial paper and bankers acceptances are bought and sold.

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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

Meet The Author

Danica De Vera

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The Future of Accounting Education: Preparing Students for a Career in the Age of AI

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What Is Activity-Based Costing (ABC)?

How activity-based costing (abc) works, requirements for activity-based costing (abc), benefits of activity-based costing (abc).

• Corporate Finance

Activity-Based Costing (ABC): Method and Advantages Defined with Example

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.

Key Takeaways

• Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. 
• The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.
• An activity is a cost driver , such as purchase orders or machine setups. 
• The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. 

ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

Investopedia / Theresa Chiechi

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

• Identify all the activities required to create the product. 
• Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.
• Assign each cost pool activity cost drivers, such as hours or units. 
• Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. 
• Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. 
• Multiply the cost driver rate by the number of cost drivers. 

As an activity-based costing example, consider Company ABC that has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked, which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10.

Activity-based costing benefits the costing process by expanding the number of cost pools that can be used to analyze overhead costs and by making indirect costs traceable to certain activities. 

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involve counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours, to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity , unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity.

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. 

Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. 

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation , utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.

Chartered Global Management Accountant. " Activity-Based Costing (ABC) ."

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• Key Differences

Know the Differences & Comparisons

Difference Between Cost Allocation and Cost Apportionment

Based on the relation of the cost item with the cost center or unit, to which it is imposed, the cost item is allocated or apportioned and not as per the nature of the expense.

Take a read of this article excerpt, in which you can find the fundamental differences between allocation and apportionment of cost.

Content: Cost Allocation Vs Cost Apportionment

Comparison chart, definition of cost allocation.

Cost Allocation, as the name suggest, is the direct allotment of cost to the traceable cost object. It is the process of associating the expenses incurred, to different departments of the organization.

When a particular cost item is easily recognizable with a cost unit, i.e. product, or cost center, then these costs are charged to the concerned cost center or unit, and the process is called as cost allocation. In finer terms, it is the full-fledged distribution of an overhead item to the department, rationally.

Therefore, a process, in which there is an outright charging of whole cost items to the concerned cost center, is termed as cost allocation. The two factors responsible for cost allocation are:

• Respective cost unit or cost center, causing the overhead to be incurred.
• Definite amount of cost is to be calculated.

For instance : Salary paid to the employees of the maintenance department, can be allocated to that department.

Definition of Cost Apportionment

When the cost items cannot be outrightly charged to or accurately traceable to a particular cost center, then such items of cost are prorated amongst various cost objects, on an equitable basis, this process is known as cost apportionment. It is the distribution of different items of cost in proportions to the cost unit or cost center on a suitable basis.

In simple terms, the expenses which are unallowable are dispersed over multiple departments, is known as apportionment.

For instance : Wages paid to the head of the factory, rent of factory, electricity, etc. cannot be charged to a particular department, then these can be apportioned amongst various departments.

The basis for apportionment of costs is determined after proper examination of the relationship between the base and different variables. It is important to predetermine an appropriate basis for apportionment, which guarantees the equitable share of common overheads for the departments. The basis should be periodically reviewed, to improve the accuracy. It is based on the principles of:

• Service Rendered
• Survey or Analysis Method
• Ability to bear

Key Differences Between Cost Allocation and Cost Apportionment

The difference between cost allocation and cost apportionment can be drawn clearly on the following grounds:

• Allocation of cost means a process in which the entire amount of overhead is charged to a specific cost center. On the contrary, Apportionment of cost can be understood as the distribution of proportions of cost items to the cost unit, i.e. product or service or the cost center.
• Allocation of the cost is possible only when the cost is recognized as particularly imputable to a specific cost center. Conversely, apportionment of the cost is needed when the cost cannot be allocated to a particular cost center. Instead, the cost is shared by two or more cost centers, as per the expected benefit received.
• As allocation of overhead is a sheer process of departmentalization of expenses, the overheads are directly assigned to the department. In contrast, cost apportionment involves the proportionate distribution of cost to different departments, on a reasonable basis.
• Cost allocation is applied when the overhead is associated with a particular department. As against this, cost apportionment is applied when the overhead is related to various departments.

Both allocation and apportionment of cost aim at identifying and assigning the cost to the cost center, but they are different. Cost Allocation is the process of assignment of cost item to the cost object, which is directly traceable. On the other hand, cost apportionment is for those indirect cost items, which are leftover in the process of cost allocation.

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Assignment Problem: Meaning, Methods and Variations | Operations Research

After reading this article you will learn about:- 1. Meaning of Assignment Problem 2. Definition of Assignment Problem 3. Mathematical Formulation 4. Hungarian Method 5. Variations.

Meaning of Assignment Problem:

An assignment problem is a particular case of transportation problem where the objective is to assign a number of resources to an equal number of activities so as to minimise total cost or maximize total profit of allocation.

The problem of assignment arises because available resources such as men, machines etc. have varying degrees of efficiency for performing different activities, therefore, cost, profit or loss of performing the different activities is different.

Thus, the problem is “How should the assignments be made so as to optimize the given objective”. Some of the problem where the assignment technique may be useful are assignment of workers to machines, salesman to different sales areas.

Definition of Assignment Problem:

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Suppose there are n jobs to be performed and n persons are available for doing these jobs. Assume that each person can do each job at a term, though with varying degree of efficiency, let c ij be the cost if the i-th person is assigned to the j-th job. The problem is to find an assignment (which job should be assigned to which person one on-one basis) So that the total cost of performing all jobs is minimum, problem of this kind are known as assignment problem.

The assignment problem can be stated in the form of n x n cost matrix C real members as given in the following table:

Understanding Global Assignment Costs

By LaQuita Morrison, GMS

Confidence in the U.S. economy is rising, and with it, the number of companies seeking to establish, strengthen or expand their global positions is increasing. Often, this involves expatriating talent to fill key positions in other countries. Some companies will also provide global assignment opportunities to expand their employees’ knowledge and skills.

Whether your company is well versed or new to managing global assignments, the cost of them can be daunting. However, when appropriately managed, global assignments can positively impact a company’s global business goals.

Sending an employee and a family of three on a three-year global assignment could cost in excess of USD $1 million. So, it’s not surprising that many global companies believe traditional overseas assignments are cost-prohibitive. Some companies have reduced, frozen or even eliminated their global assignment programs. However, to remain competitive, companies still need to place the best talent at the appropriate locations, and often that talent isn’t available without a global transfer. This is when the proper management and oversight of relocation costs becomes imperative.

Understanding the Costs

If you’re planning global assignments, there are ways to scale back costs without compromising operations or impacting employee productivity. Finding that balance between employee support and cost management to successfully oversee global assignments is a challenge, but it can be done. Below is a list of some of the expenses associated with a global assignment:

• Candidate Assessment – Conducted by the company to determine if the employee is the right candidate for the global assignment.
• Pre-Decision Assessment – Aligns the individual needs of the employee and the employee’s family with the business goals of the assignment.
• Immigration – Obtaining the appropriate documentation for the assignment. The reason for the assignment will dictate the appropriate visa type.
• Tax Implications – Determining the tax implications of the assignment and responsibilities of both the company and the employee.
• Tax Assistance – Providing the employee with tax assistance, which could include consultation; preparation (for both home and host countries); filing (for both home and host countries); tax equalization.
• Host Country Housing – Providing reasonable and customary rent and utility costs for the employee’s housing in the host country according to regional guidelines based on family size and location.
• Cost-of-Living Allowance (COLA) – An allowance or differential paid to the employee for similar goods and services in the host location that they have in the home location based on family size and salary. Intended to cover costs to purchase host country goods and services over those from the home country.
• Transportation – An allowance for a car for the duration of the assignment, the amount of which may vary by location and family size.
• Hardship – An allowance paid in addition to salary and COLA for assignments in locations designated as a hardship for the employee based on factors that include potential violence, incidence of disease, medical care quality, geographic isolation and availability of goods and services.
• Miscellaneous Expense Allowance – One-time payment made, separate from base salary, intended to cover expenses not expressly covered in the Letter of Understanding, like renter’s insurance, obtaining a new driver’s license, immunizations, taxis, etc.
• Cultural/Language Training – Provided to the employee and the family to assist in understanding the host country culture and language.
• Home Finding and Destination Services – Locating housing in the host country, as well as registering with local authorities and setting up accounts.
• Departure Services – Home sale, property management, lease termination, etc.
• Global Household Goods – Transporting (via land, air and/or sea) or storing household goods and personal effects.
• Temporary Living – Fully furnished housing at the destination location.
• Repatriation – Return of the employee to the home country following assignment completion.

To learn more about managing global assignment costs, download our free guide.

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Insights + Resources

How much is the average relocation package & what is included, what is an executive relocation package, how to build an effective hr communication strategy, should your relocation package include hardship allowances.

What is WACC?

• Components of WACC 
• Calculating WACC 

The significance of WACC

• Challenges in calculating WACC 
• WACC in different industries 

Understanding Weighted Average Cost of Capital (WACC)

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• Weighted average cost of capital (WACC) is a key metric that shows a company's cost of capital across its debt and equity.
• If a company's WACC is elevated, the cost of financing for the company is higher, which is usually an indication of greater risk.
• Investors often use WACC to determine whether a company is worth investing in or lending money to.

The weighted average cost of capital (WACC) is a financial ratio that measures a company's financing costs. It weighs equity and debt proportionally to its percentage of the total capital structure. A company's executives use WACC in making decisions about how to fund operations or projects, and it helps investors determine the minimum rate of return they're willing to accept on their money.

Companies raise capital from external sources in two main ways: by selling stock or taking on debt in the form of bonds or loans. Understanding the cost of that financing is a crucial part of the decision-making process for managers running the business, and a key metric for investors in choosing whether to invest. If a company has just one type of capital, equity or debt, figuring out the cost is relatively straightforward. WACC is a more complicated measure of the average rate of return required by all of its creditors and investors. 

By reading this article, you can learn more about the impact WACC has on investment analysis. 

Definition and importance of WACC 

WACC determines the rate a company is expected to pay to raise capital from all sources. This includes bonds and other long-term debt, as well as both common and preferred shares of stock. It gives management a view of its overall cost of borrowing and helps determine how much of a return on new projects or operations will be required to justify the cost of financing them. Investors use WACC to decide if the company is worth investing in or lending money to. If the WACC is elevated, the cost of financing for the company is higher, which is usually an indication of greater risk. Conversely, a lower WACC signals relatively low financing cost and less risk. "The formula uses the cost of each of the sources of capital and weighs them relevant to the market value of the business," says Daniel Milan, an investment advisor at Cornerstone Financial Services. "This is important because it gives an analyst an idea of how much interest a company has to pay for each dollar that it finances for its operations or assets. This is critical in the evaluation of the value of an investment."

Components of WACC 

Cost of equity  .

The cost of equity is one component of calculating a company's WACC. The cost of equity is the return that a business pays out to its equity investors. In other words, it is the expense that a company must incur if it uses equity to finance expenditures.  

Equity can refer to a company's common and preferred shares, as well as its retained earnings. 

Cost of debt 

The cost of debt is the interest that a company needs to pay on money that it borrows. This applies to both loans taken out and bonds issued by the organization. The higher the cost of debt is, the greater the return the business needs to generate in order to break even on the funds it borrows. 

Capital structure 

A company's capital structure is its combination of equity and debt. For example, if a company has issued both common shares of stock and also bonds, these are both counted in its capital structure. Businesses use their capital structure to finance operations and growth. 

Calculating WACC 

Formula and step-by-step calculation .

There are a couple of ways to calculate WACC, which is expressed as a percentage. Here's the basic formula:

In essence, you first establish the cost of debt and the cost of equity. Then you multiply each of those by their proportionate weight of market value. Add those two figures together and multiply the result by the business's corporate tax rate.

A more complicated formula can be applied in the event that the company has preferred shares of stock , which are valued differently than common shares because they typically pay out fixed dividends on a regular schedule.

Investment decision making

By evaluating a company's WACC, an investor can get a better sense of how hard, or easy, it is for a business to raise capital. The WACC can serve as a hurdle rate, meaning the bare minimum return that an investment or project must return in order to be justified by the interested parties. 

With this information, an interested party can get a better sense of what expenses a company will need to incur in order to invest in projects that could potentially help it grow its revenue and/or earnings. 

Further, financial analysts can use the WACC to evaluate companies that are being considered for merger and/or acquisition activity. Past that, analysts can use the WACC when evaluating internal investments, as the aforementioned metric provides interested parties with a company's opportunity cost of capital. 

Company valuation

Financial analysts can use the WACC when valuing a company. More specifically, they can use this metric when using an organization's cash flows, which refer to the money that is expected to flow in and out of a business, to determine that company's value. 

In other words, DCF (discounted cash flow) attempts to determine what an investment is worth today based on its future expected cash flows. Interested parties can use DCF when evaluating a potential investment in securities like stocks or bonds, or they can use it to consider internal investments. 

More specifically, this approach uses something called the discount rate, the interest rate used to calculate an investment's present value. The WACC can be used as the discount rate when calculating the value of a company. 

Assessing project risk 

A company can use the WACC to evaluate whether an internal project is worth pursuing or not. Since the aforementioned metric represents a company's cost of capital, it tells you the opportunity cost of devoting money to a particular project or venture. 

The WACC can be weighed against a project's internal rate of return (IRR), which represents the annual return that a particular investment is expected to produce. If the IRR of a project exceeds its WACC, that project is expected to generate a positive return and is worth pursuing. However, if the IRR is below the WACC, the project's return will be insufficient and not worth it. 

Challenges in calculating WACC  

Estimating component costs .

A company's WACC can include many different components, including varying kinds of debt and equity. If an organization's balance sheet is more complex, it can make it more difficult to determine WACC. 

For example, if a company uses different kinds of debt that do not all have the same interest rate, this can make calculating WACC more complicated. 

Changing capital structure 

A company's capital structure can change over time, for example if the cost of using debt becomes more expensive. A lender could easily extend credit to an organization with a variable interest rate that pushes higher if market conditions allow it. 

Another development that can cause a company's capital structure to change is a shift in tax policy. For example, if marginal tax rates increase, it could motivate a business to generate more credit by issuing bonds instead of harnessing private lines of credit from a bank. 

WACC in different industries  

Industry-specific considerations .

It is important to keep in mind that there are significant differences in WACC across industries, meaning that this measure can vary quite a bit based on what sector is being examined. High-tech firms, for example, might rely quite a bit on private investments from sources like venture capital. As a result, using WACC provides the greatest benefit when it is used to look at companies within the same industry. 

Impact of operational risk on WACC  

If operational risk, the risks associated with everyday business activities, increases, it can cause a company's WACC to push higher. If investors perceive a company as riskier, they may need to be compensated with a higher rate of return before putting their money into that organization. 

Further, if a company has a higher WACC, this could be interpreted as signaling greater operational risk in the organization, as it can indicate that investors require greater returns to offer their backing. 

WACC has a wide range of applications, helping interested parties to evaluate potential investments and value companies, by measuring what a company needs to pay for capital. 

You can estimate a company's cost of equity using models like capital asset pricing model, which consider variables like the risk free rate of return, along with an asset's beta (risk relative to the market) and the market's expected return. 

Yes, a company's WACC can change over time, due to shifts in interest rates, market conditions, a company's capital structure or even an increase in an organization's perceived operational risk. 

Debt is a major component of a company's WACC. If a company changes its capital structure to rely more on debt, this will frequently reduce the WACC, as the cost of debt is lower than the cost of equity. Likewise, if the company depends more on equity to finance its operations, this could increase its WACC. 

A lower WACC is usually better, as it means a company is paying less for credit to finance its operations. However, interested parties should use other metrics to evaluate a company's financial health.

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What consumers should know as Philips agrees to $1.1 billion CPAP settlement

Bill Chappell

The medical device maker Philips has agreed to a $1.1 billion settlement to address claims brought by thousands of people with sleep apnea who say they were injured by the company's CPAP machines. Smith Collection/Gado/Getty Images hide caption

The medical device maker Philips has agreed to a $1.1 billion settlement to address claims brought by thousands of people with sleep apnea who say they were injured by the company's CPAP machines.

Millions of CPAP sleep apnea machines made by the medical device maker Philips and a subsidiary were found to have a dangerous problem, triggering consumer lawsuits and a massive recall in 2021. Now, Philips has reached a $1.1 billion deal to settle claims from people who say they were injured. A portion of the funds will also go toward medical monitoring.

Some 15 million Philips CPAP and ventilator machines worldwide are affected by the Class I recall, a designation reflecting "a reasonable probability that the use of, or exposure to, the products will cause serious adverse health consequences or death," according to the Food and Drug Administration .

The devices were sold between 2008 and 2021 in the U.S. under the Philips Respironics brand, according to Philips' recall notice .

"Since April 2021, the FDA has received more than 116,000 MDRs [Medical Device Reports], including 561 reports of death," that were either reported or suspected to be related to problems with insulating foam in the Philips devices, the FDA said earlier this year.

"Philips and Philips Respironics do not admit any fault or liability, or that any injuries were caused by Respironics' devices," the company said as it announced the new settlement agreement.

Here's an overview of the recall and where consumers stand:

Settlement money will likely flow next year

The $1.1 billion deal — which includes $25 million for medical monitoring — stems from mediation by retired magistrate judge Diane M. Welsh, but it's not yet final, as the agreement must be filed with a federal court in Pennsylvania — a main state where the machines were produced.

Philips announced the new settlement on Monday, along with its first-quarter financial results. The Dutch-based corporation then saw its stock price vault to a likely one-day record gain, as investors welcomed news that the recall issue seems to have been resolved at a lower cost than analysts predicted.

"The remediation of the sleep therapy devices for patients is almost complete," said Roy Jakobs, CEO of parent company Royal Philips, in a statement. He added, "We do regret the concern that patients may have experienced."

"We are pleased to have reached a resolution" of personal injury claims, the plaintiffs' co-lead attorneys, Sandra L. Duggan; Kelly K. Iverson; Christopher A. Seeger; and Steven A. Schwartz, said in a joint statement to NPR.

The money will go to "users of the now-recalled CPAP and other respiratory devices who suffer from significant physical injuries," and to fund research into treating their injuries, the attorneys said. Philips says some 58,000 people have filed claims or registered for the settlement.

As for when consumers could see money from the deal, Philips said it expects to make the payments in 2025.

This isn't the only settlement

News of the personal injury settlement comes a week after Philips settled a class-action lawsuit over economic damages from the recall.

That settlement is worth a minimum of $613.3 million, including $94.4 million in attorneys' fees. It offers reimbursement to users and "payers" — e.g., insurance companies — for recalled machines they had bought or leased.

The deal was approved last Thursday by senior U.S. district judge Joy Flowers Conti in the federal Court in western Philadelphia. The judge had previously appointed Welsh to serve as mediator in the injury-related class-action suit.

Philips says it expects to pay that money out this year.

What can consumers do?

Under the financial-loss settlement, users are entitled to a $100 award if they return their recalled device by Aug. 9, 2024 — the claim deadline.

People who suspect they own or use one of the affected devices should act soon to verify that if they haven't already, the FDA says . The agency notes that Philips' recall page offers ways to check serial numbers and register a product.

A specially dedicated website is accepting claims for the financial-loss settlement , and it notes that taking part in that deal "does not affect or release any claims for personal injuries or medical monitoring relief."

Under the financial-loss settlement, users are also eligible for a payment for each recalled device they purchased, leased, or rented — and if they paid out of their own pocket to replace a recalled machine, they could be entitled to a device replacement award, according to the website.

The arrangement includes a prepaid shipping label, although the administrators also warn users to consult with their doctor before returning a device they're still using.

A similar claims process will likely emerge for the injury-related deal once its terms are finalized.

Defective machines can send particles, VOCs into airways

The recall was triggered by thousands of health complaints from CPAP users. An investigation found that a polyester-based polyurethane foam built into the devices to dampen sound and vibration also had a risk of breaking down — especially when used in warm and humid conditions.

"If the foam breaks down, black pieces of foam, or certain chemicals that are not visible, could be breathed in or swallowed by the person using the device," the FDA said.

The agency said in a letter to Philips in 2022 that the foam also "may degrade and/or emit harmful chemicals, potentially resulting in toxic and carcinogenic effects and other significant harms to device users," listing formaldehyde and other volatile organic compounds, or VOCs.

"Philips has acknowledged that, in a worst-case scenario, exposure to VOCs as a class may cause possible toxic and carcinogenic effects, as well as irritation of the respiratory tract, eyes, nose, and skin, nausea or vomiting, hypersensitivity reactions, dizziness, and headache," the FDA said.

Resulting problems "could potentially result in serious injury and may require medical intervention to prevent permanent injury," the agency said.

The plan to fix machines with the problem call for replacing the polyester-based foam with one that uses silicone as its base .

What is the current status of Philips CPAP machines?

U.S. sales of Philips' popular DreamStation and other respiratory units are currently on hold; the company says it plans to resume selling the devices once it has satisfied the terms of a consent decree with the U.S. government .

Philips also says it will continue to service units that are still in use, including by providing replacement parts.

Shots - Health News

You snooze, you lose: how insurers dodge the costs of popular sleep apnea devices.

Lawsuits against the company contend that Philips designed its CPAP machine poorly and put it on the market without appropriate warnings.

The FDA accuses Philips of not taking appropriate action about the dangers of the degrading foam in its CPAP and ventilator devices despite learning about the risk as early as 2015. That year, the FDA said in a letter to the company, a Philips subsidiary began a preventative procedure because of complaints about the foam breaking down. The agency says it learned about the matter when the FDA inspected a manufacturing plant in Murrysville, Pa., in 2021.

When asked about the 2015 revelation, a company representative said the only documentation of the issue was a single email, with other communications handled over the phone, the FDA said in its letter.

What is sleep apnea, and how much do CPAP machines cost?

Sleep apnea is a disorder that prevents people from getting enough oxygen while they're sleeping — it's often characterized by long pauses in breathing, and loud snoring. People diagnosed with the disorder rely on continuous positive airway pressure, or CPAP, machines to keep their airways open and help them stay asleep.

Last June, the White House said President Biden was using a CPAP machine to help with sleep apnea.

Prices for many units range from around $500 to more than $1300.

"The average cost of a CPAP machine is about $800 among those we reviewed," the National Council on Aging said last year.

The recall also covers some models of Philips' more complicated BiPAP ventilators, which facilitate both inhalation and exhalation and routinely cost hundreds of dollars more.

Many apnea and ventilator devices' users also face additional costs, from replacements parts and upkeep to buying an additional machine for travel.

Watch CBS News

How airline "drip pricing" can disguise the true cost of flying

By Megan Cerullo

Edited By Alain Sherter

Updated on: April 24, 2024 / 2:47 PM EDT / CBS News

With many airlines now hawking "unbundled" fares, it's easy for travelers to mistake low advertised prices for cheap plane tickets . But for consumers eager to get the best deal on flights heading into the summer travel season, it pays to learn how "drip pricing" can make airfare more expensive.

Indeed, selecting the cheapest base fare is no longer the best way to get a good deal, according to travel experts. That's because airlines now routinely charge more money for "extras" such as seat assignments,  checked bags , snacks or wifi. 

"Nobody likes feeling nickel-and-dimed, like the price they saw for a flight was a bait and switch," Scott Keyes, founder and CEO of travel site Going.com, told CBS MoneyWatch.

Here's what to consider. At first glance, the initial pricing for a flight you find on an online travel site might seem temptingly low. But after factoring in the cost of selecting your seat, checking bags and other add-ons, the fare can end up being much higher — as much or more than an all-inclusive fare.

This model, commonly referred to as drip pricing, can certainly boost an airline's revenue, and proponents say it benefits consumers by allowing them to pay only for the perks they truly value. For their part, critics say it makes it harder to determine the true cost of flying and to compare prices among airlines.

Keyes traces drip pricing back to 2008, when airlines began charging passengers to check second bags. That allowed full-service carriers to offer a lower-cost, no-frills ticket in order to compete with budget carriers.

"That lower headline price brought people in — then they started adding seat-selection fees," Keyes said. "It's an innovation from the budget airlines that the entire industry has copied and that full-service airlines have adopted for themselves."

"It makes it very difficult"

For consumers, however, the problem with unbundling fares is it makes it trickier to compare what different airlines charge for tickets, experts told CBS MoneyWatch. 

"It makes it very difficult to find out what the all-in price will be," said Columbia Business School marketing professor Vicki Morwitz, who authored a  report on how consumers react to drip pricing.

Her research shows that consumers tend to book the ticket option that looks cheaper upfront, but costs more once add-ons are factored in.  "Consumers make a mistake and spend more money than they needed to spend," she explained. 

Jay Sorensen, president of IdeaWorks, a consultancy that has advised U.S. airlines, agrees that drip pricing makes comparing airline ticket prices more complicated. But he still thinks it can benefit consumers by letting them pay for the extras they want, while leaving behind those that aren't important to them. 

"The outcome is of course that it's more difficult to compare between different products and airlines," he said. "While that's true, airlines, as profit-seeking companies, are under no obligation to make it easier to compare with their competitors."

Sorensen compared the experience of booking airfare today to shopping for groceries.

"You roll in with your shopping cart, and as you walk through the aisles you toss stuff in your cart," he said. "You buy a base fare, and as you go through the booking path you add things to the cart, like a checked bag, seat assignment, or pay to book a meal or other services," he said. "That's dramatically different from the way travel was once sold in U.S."

Megan Cerullo is a New York-based reporter for CBS MoneyWatch covering small business, workplace, health care, consumer spending and personal finance topics. She regularly appears on CBS News 24/7 to discuss her reporting.

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Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut

Tommy Marshall, 56, of Atlanta, poses for a portrait on Tuesday, April 16, 2024, in Atlanta. Marshall who has type 1 diabetes, paid $251 dollars for four to eight weeks worth of medication in November. “Even if you can afford it, just paying that much for something that you know is a massive profit center for the drug company is challenging,” said Marshall, a lifelong Democrat. He added of Biden, “If I was a his political consultant I’d be telling him to talk about it constantly.” (AP Photo/Brynn Anderson)

FILE - President Joe Biden speaks during a campaign event in Scranton, Pa., April 16, 2024. Rarely a day goes without Biden mentioning insulin prices, constantly touting a $35 insulin price cap for Americans with diabetes who are on Medicare. But many people benefiting from the price cap were already paying far less than that for insulin. Others were already Biden supporters. That raises questions about how whether the issue can be as effective as the president believes. (AP Photo/Matt Rourke, File)

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WASHINGTON (AP) — Rarely a day goes without President Joe Biden mentioning insulin prices.

He promotes a $35 price cap for the medication for Americans on Medicare — in White House speeches, campaign stops and even at non-health care events around the country. His reelection team has flooded swing-state airwaves with ads mentioning it, in English and Spanish.

All that would seemingly add up to a sweeping political and economic impact. The reality is more complicated.

As his campaign tries to emphasize what it sees as an advantage over presumptive Republican nominee Donald Trump , Biden often overstates what those people who are eligible for the price cap once paid for insulin. It’s also not clear whether the number of Americans being helped will be enough to help sway November’s election, even in the most closely contested states that could come down to a few thousand votes.

“It is about political signaling in a campaign much more than it is about demonstrating for people that they benefit from the insulin cap,” said Drew Altman, president and CEO of KFF, a nonprofit that researches health care issues. “It is a way to make concrete the fact that you are the health care candidate.”

Many who are benefiting from the price cap were already getting insulin at reduced prices, were already Biden supporters, or both. Others who need reduced-price insulin, meanwhile, cannot get it because they do not have Medicare or private health insurance.

Biden’s campaign is emphasizing the president’s successful efforts to reduce insulin prices and contrasting that with Trump , who first ran for president promising to lower drug prices but took limited action in office.

“It’s a powerful and tangible contrast,” said Biden campaign spokesman Charles Lutvak. “And it’s one we are campaigning on early, aggressively, and across our coalition.”

PRICE REDUCTIONS ACROSS THE BOARD

Roughly 8.4 million people in the United States control their blood sugar levels with insulin, and more than 1 million have Type 1 diabetes and could die without regular access to it. The White House says nearly 4 million older people qualify for the new, lower price.

The price cap for Medicare recipients was part of the Inflation Reduction Act , which originally sought to cap insulin at $35 for all those with health insurance. When it passed in 2022, it was scaled back by congressional Republicans to apply only to older adults.

The Biden administration has also announced agreements with drugmakers Sanofi, Novo Nordisk and Eli Lilly, to cap insulin co-payments at $35 for those with private insurance. They account for more than 90% of the U.S. insulin market.

But Biden says constantly that many people used to pay up to $400 monthly, which is an overstatement . A Department of Health and Human Services study released in December 2022 found that people with diabetes who were enrolled in Medicare or had private insurance paid an average of $452 annually, not monthly.

The high prices the president cites mostly affected people without health insurance. But the rates of the uninsured have fallen to record lows because of the Obama administration’s signature health care law and the Biden White House’s aggressive efforts to ensure those eligible to enroll are doing so more frequently.

So, in effect, one of the administration’s policy initiatives is undermining the economic argument for another.

That effort has not reached everyone, though.

Yanet Martinez who lives in Phoenix and supports Biden. She does not work or have health insurance, but gets insulin for around $16 per month thanks to steep discounts at her local clinic.

The lower prices only apply if her husband, a landscaper, does not make enough to exceed the monthly income limit. If he does, her insulin can jump to $500-plus, she said.

“I’ve heard people talk about the price of insulin going down. I’ve not seen it,” said Martinez, 42. “It should be uniform. There are a lot of people who don’t have any way to afford it and it makes things very difficult.”

Sen. Raphael Warnock, D-Ga., is sponsoring bipartisan legislation to make the $35 insulin cap universal, even for people without health insurance. In the meantime, he said, what’s been accomplished with Medicare recipients and drugmakers agreeing to reduce their prices is “literally saving lives and saving people money.”

“This is good policy because it centers the people rather than the politics,” Warnock said. He said that as he travels Georgia, a pivotal swing state in November, people say “thank you for doing this for me, or for someone in my family.”

That includes people like Tommy Marshall, a 56-year-old financial services consultant in Atlanta, who has health insurance. He was diagnosed with Type 1 diabetes at age 45 and injects fast-acting insulin several times daily. He paid about $250 for four weeks to eight weeks worth of medication last November, but saw the price fall by half in February, after Novo Nordisk agreed to cut prices.

“If I was his political consultant, I’d be telling (Biden) to talk about it constantly,” said Marshall, a lifelong Democrat and longtime public advocate for cutting insulin prices, including for the advocacy group Protect Our Care Georgia.

Marshall said the price caps “have meaningful emotional resonance” and could sway a close election but also conceded, “You’re talking about 18- to 65-year-olds. I can just imagine there’s probably two or three other issues that are in front of this one.”

“Maybe someone sort of on-the-fence, he added “this could maybe sway them.”

ONE OF BIDEN’S KEY ISSUES

Geoff Garin, a pollster for Biden’s reelection campaign, said the insulin cap is one of the president’s highest performing issues. He said the data was “clear, consistent and overwhelming.”

Rich Fiesta, executive director of the Alliance for Retired Americans, which has endorsed Biden, called the insulin cap a strong issue for the president among older voters.

“For the persuadables — and there are some still out there, believe it or not — drug costs are a very important factor,” said Fiesta, whose group has 4.4-million members and advocates for health and economic security for older people.

Trump’s campaign did not respond to questions. But Theo Merkel, senior fellow at the conservative Paragon Health Institute, countered that the insulin price cut an example of “policies written to fit the talking points other than the other way around.”

Merkel, who was a Trump White House adviser on health policy, said manufacturers that have long made insulin prefer caps on how much the insured pay because it gives them more leverage to secure higher prices from insurance companies.

The president’s approval ratings on health care are among his highest on a range of issues, but still only 42% of U.S. adults approve of Biden’s handling of health care while 55% disapprove, according to a February poll from The Associated Press and the NORC Center for Public Affairs Research.

KFF found in its own poll in December that that 59% of U.S. adults trust the Democratic Party to do a better job addressing health care affordability issues compared to 39% for Republicans, even if only 26% of respondents in the same poll said they knew about the insulin price cap.

“In political terms, the Democrats and Biden have an advantage on health care,” Altman said. “They’re pressing it.”

The FCC restores net neutrality - here's what it means for the internet

The decision, overseen by FCC Chair Jessica Rosenworcel, marks a significant policy reversal from the Trump administration's deregulatory stance. 

Seven years ago, the Federal Communications Commission (FCC), under President Donald Trump's hand-picked Chair Ajit Pai , a former Verizon in-house lawyer, killed off net neutrality . In a decisive move, the now Democrat-controlled FCC has restored net neutrality rules along a 3-2 party-line vote.

Also: How to see if your internet provider is overcharging you (or delivering slower speeds)

Overseen by FCC Chair Jessica Rosenworcel, the FCC has reinstated rules ensuring equal treatment for all internet traffic, marking a significant policy reversal from the Trump administration's deregulatory stance. The restored rules aim to ensure that broadband internet remains devoid of any preferential treatment or restrictions by internet service providers (ISPs).

Net neutrality seeks to ensure all internet traffic is treated equally, without discrimination. The policy means that ISPs shouldn't be allowed to speed up, slow down, or block access to specific websites or online services. Net neutrality aims to ensure that the internet remains a level playing field for everyone.

Net neutrality has been a vital component of the internet's operation for decades. Indeed, the basic concept of all ISPs sharing bandwidth equally and equitably dates back to the Commercial Internet Exchange (CIX) , which made way for today's internet. 

Specifically, the return of net neutrality in the US means, according to the FCC, that ISPs " will again be prohibited from blocking, throttling, or engaging in paid prioritization of lawful content." This is the formation of a national policy standard to "ensure that broadband internet service is treated as an essential service."

According to the FCC, these changes also mean that the agency can now play an active role "when workers cannot telework, students cannot study, or businesses cannot market their products because their internet service is out."

Rosenworcel also said the FCC can now stop ISPs from selling Americans' personal data or sharing it with tech companies to train artificial intelligence (AI) models. This does not mean, however, that the FCC will be " policing online speech . On the contrary, freedom of speech will be enhanced by open internet protections, because they will prevent broadband providers from blocking or disfavoring any type of online speech."

Also: Net neutrality: What it is and why we're talking about it again

In an oral dissent, FCC commissioner Brendan Carr called this policy shift nothing more than a " power grab ." He wasn't the only one. Republican politicians, including House Energy and Commerce Committee Chair Cathy McMorris Rodgers and Senator Ted Cruz, also labeled the plan an " illegal power grab. " They argue that it subjects the broadband industry to burdensome regulations, which could include rate regulations and other restrictive measures.

Other critics of the return of net neutrality, such as the US Chamber of Commerce, agree. The Chamber lambasted the recent FCC decision, claiming it re-imposes an antiquated regulatory framework on a modern broadband landscape, potentially hampering future technological investments and innovation.

Conversely, public interest advocates like Free Press heralded the move as a pivotal victory for consumers, empowering the FCC to keep major ISPs like AT&T, Comcast, and Verizon accountable for any detrimental practices affecting internet users.

 "This is a huge victory for the public interest," Free Press said in a statement. "The agency now has the ability to protect the free and open internet -- and to track service outages, protect internet users from ISPs' privacy invasions, promote broadband competition and deployment, and take action against hidden junk fees, data caps, and billing rip-offs."

Also: The best business internet providers  

Some tech organizations, such as the Computer & Communications Industry Association (CCIA), which includes tech giants such as Amazon, Apple, Alphabet, and Meta, have voiced support for the restored net neutrality rules. The CCIA's chief of staff and SVP Stephanie Joyce said the "CCIA applauds and thanks the FCC for restoring the light-touch but necessary Open Internet rules that will give broadband internet access subscribers the protections that Congress established for all users of telecommunications."

This issue is far from settled. The battle for net neutrality will now be played out in the courts and the ballot boxes. 

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Student protesters are demanding universities divest from Israel. What does that mean?

Pro-Palestinian demonstrators are calling on universities to sell investments in companies they say are complicit in war in Gaza

As protests against Israel’s offensive in Gaza are spreading throughout American campuses, one demand made by students across schools keeps coming up: divestment from Israel .

Universities rely on endowments to fund things like research and scholarships, and those endowments are typically invested in companies and alternative asset classes, such as private equity and hedge funds.

Broadly speaking, calls for divestment are demands to sell investments in companies that students say are complicit in the war. But what specifically are students asking for?

What are these divestment campaigns about?

Student protesters calling for divestment from the war in Gaza have chosen divergent targets.

At Columbia, students are demanding the university drop its direct investments in companies doing business in or with Israel, including Amazon and Google, which are part of a $1.2bn cloud-computing contract with Israel’s government; Microsoft, whose services are used by Israel’s ministry of defense and Israeli civil administration; and defense contractors profiting from the war such as Lockheed Martin , which on Tuesday reported its earnings were up 14% .

Students at the University of California, Berkeley, have similarly called for divestment of Israel across the board, as have student groups at New York University. 

Other groups, such as Yale University’s Endowment Justice Coalition and student groups at Cornell University, are pushing administrators to drop investments in weapons manufacturers specifically.

Some campus organizers are fusing the demands for fossil fuel divestment, which has become a popular target of campus activism over the past decade, and divestment from the war in Gaza. On Monday, Sunrise’s Columbia chapter held a Reclaim Earth Day event at the Columbia encampment to call attention to the relationship between the climate crisis and the war in Gaza. That includes the emissions from the aircraft and tanks Israel is using for the war as well as those generated by making and launching bombs, artillery and rockets, not to mention the environmental devastation .

Yale’s Endowment Justice Coalition, which is leading the push for divestment from weapons manufacturers, is also calling for fossil fuel divestment.

Is there precedent for these kinds of divestment campaigns?

Divestment movements have a long history among US student activists.

In 1965, the Student Nonviolent Coordinating Committee, Students for a Democratic Society, and the Congress of Racial Equality held a New York City sit-in calling for Chase Bank to stop financing apartheid in South Africa. Throughout the 1970s and 1980s, many campus organizers also successfully pressured their schools to cut financial ties with companies that supported the apartheid regime, including Columbia, which became the first Ivy League university to do so.

The anti-apartheid campaign inspired another movement, too: the call for boycott, divestment and sanctions (BDS). Co-founded by the Palestinian Columbia University alumnus Omar Barghouti, BDS is a strategy that aims to end international support for Israel due to its treatment of Palestinians – a relationship many scholars and officials describe as another apartheid .

More recently, fossil fuel divestment campaigners have seen significant wins on US campuses, with about 250 US educational institutions committing to pull investments in polluting companies, according to data from Stand.earth and 350.org.

Is there any chance these campaigns will succeed?

Calls to divest from Israel have seen more muted success . While numerous campus groups have called for their institutions to take up the BDS framework, no US universities have made such a commitment.

In 2009, Hampshire College divested from a mutual fund with Israeli holdings after facing pressure from BDS activists. (Administrators officially denied the decision was boycott-related.)

Other colleges have been forced to consider the issue: in 2019, for instance, a Brown committee recommended the university divest from companies linked to human rights violations, said Olivia Katbi, organizer with the BDS movement. 

Campus groups at some universities have also passed non-binding resolutions calling for divestment. American University’s student government association, for instance, passed a resolution on Sunday calling for the university to divest support from Israel, but the university president, Sylvia Burwell, has said the school would not comply with their demand.

Though they are facing an uphill battle, supporters of divestment say their campaigns have brought awareness to the issues they are highlighting.

Matt Leonard, director of the Oil and Gas Action Network and an early advocate for fossil fuel divestment in the US, said the campaigns against polluters had made it more difficult for oil majors to recruit young talent. He hopes to see the same dynamic play out for profiteers of the war in Gaza, including Lockheed Martin and Raytheon, which makes the Israeli missile defense system known as the Iron Dome.

But just as the movements have inspired one another, backlash has inspired backlash. In 2021, for instance, Texas passed a law forbidding the state from doing business with entities that “boycott energy companies”.

That law, which has sparked copycat legislation in several other states, was inspired by a 2017 law designed to prevent the state from doing business with entities that advocate BDS in support of Palestine. 

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