Cost Centre and Cost Unit: What You Need To Know

COST CENTRE AND COST UNIT

Cost Unit

Definition
According to businessdictionary.com, In cost accounting, cost unit is the unit of product or service for which cost is computed. Cost units are selected to allow for comparison between actual cost and standard cost, or between different actual costs.


In the preparation of cost accounts, it is necessary to choose a unit with which expenditure may be identified. The quantity upon which cost can be conveniently allocated is known as cost unit. 

The Chartered Institute of Management Accountants (CIMA) defines a cost unit as a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed.

Unit chosen should not be ambiguous. It should be a simple and commonly used unit. The following are examples of cost units;

• Steel mills use  per ton of steel made
• Transport companies use per passenger km
• Textile mills use per yard 
• Electrical companies use per unit of electricity generated 

                Cost Centre

Definition
According to businessdictionary,com, cost centre is a distinctly identifiable department, division, or unit of an organization whose managers are responsible for all its associated costs and for ensuring adherence to its budgets. Also called cost pool or expense center.

A cost centre is a department within a company that does not produce direct profit and adds to the cost of running a company. However, all cost centres perform an important job. It improves the satisfaction of customers and indirectly increases sales.

The manager and employees of cost centre are not accountable for its profit and investment decision but they are responsible for its cost. They are liable for keeping their cost in line or below budget because cost centre does not produce directly from its activities. 

The performance of the managers is assessed by comparing the actual expenses incurred with the budgeted expenses for the cost centre. The two main types of cost centre are;

1. Product centre
2. Service centre

Cost centres may be classified into;

• Productive, unproductive and mixed cost centers  
• Personal and impersonal cost centers
• Operation and process cost center

Productive cost centers are those which are actually engaged in making products. Service or unproductive cost centers do not make the products but act as the essential aids for the productive centers. The example of such service centers Administration department.

Mixed costs centers are centres that are engaged sometimes on productive and service works. Impersonal cost center is a centre which consists of a department, a plant or an item of equipment whereas a personal cost center consists of a person or a group of persons. In case a cost center consists of those machines or persons which carry out the same operation, it is termed as operation cost center. If a cost center consists of a continuous sequence of operations, it is called process cost center. As for operation cost center, cost is analyzed and related to a series of operations in sequence such as in chemical industries, oil refineries and other process industries. The objective of such an analysis is to ascertain the cost of each operation irrespective of its location inside the factory.

 




Cost Unit and cost centre
1. Cost unit can be defined as a quantitative unit of a product, an item, or service in connection to which costs are measured.
2. A cost centre is a person, location or an item of equipment or a group of items of equipment for which costs are ascertained and used for the sole purpose of controlling cost.

3. A cost unit, simply stated, refers to a unit of finished good, services or their combination in connection to which cost is expressed and ascertained.