Basics of Cost Accounting - 7: Cost Unit and Cost Centre

Cost Unit and Cost Centre

A) Cost Unit: 

        The cost unit is defined as the unit of product, service, time, activity, or combination in relation to which cost is estimated. At the time of preparing the cost statements and accounts, a particular unit is required to be selected. It helps to identify the cost accurately and allocate the various expenses. It assists the cost measurement process of the company and promotes comparison.

Cost Unit Example- The cost unit of the hotel industry is a room and the cost unit of the steel industry would be a ton. This is preceded by the cost centre. 

There are both simple units and complex units in cost units. 

1. Simple/Single Cost Unit: A simple unit represents a single standard measurement like per kilogram, per piece, per metre, etc. 

2. Composite/Complex Cost Unit: Complex unit uses a combination of two simple units like per kilowatt-hour, per tonne-kilometre, etc. 

Characteristics of Cost Unit 

i) same as being followed throughout the industry, 
ii) very simple and easy to understand, 
iii) neither too big nor too small, 
iv) uniformly maintained over a period of time, 
v) most natural to the business, 
vi) suitable to that business and 
vii) well-accepted by all concerned. 

 

B) Cost Centre:

        In any organisation there are different departments are working. Different types of expenses are made by the company, but no separate account is opened for each and every expenditure. Cost centre means an account where particular expenses are recorded. This account is also known as cost centre. 

        For example, Stationery convers different items required in office. All such items are recorded under the stationery account. At the similar way, repairing of various machines are recorded under the repairing account. As per above discussion, Stationery A/c and Repairing A/c are known as cost centre. 

 Definitions:

1. According to Chartered Institute of Management Accountants (CIMA), London, 

“Cost centre is a location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control.”

Types of Cost Centre:

1. Personal Cost Centre:

Personal cost centers are those that are associated with specific individuals or persons in an organization. These individuals are accountable for the costs incurred within their respective areas or departments. For instance, a manager overseeing a department might be responsible for the costs related to that department, making it a personal cost center.

2. Impersonal Cost Centre:

Unlike personal cost centers, impersonal cost centers do not relate to specific individuals. These centers typically include areas where costs are accumulated that aren't directly associated with a single person but rather with specific activities or functions within the organization. For example, a maintenance department or a utilities department could be considered an impersonal cost center.

3. Production Cost Centre:

Production cost centers are segments or units where the actual manufacturing or production of goods or services occurs. These centers directly contribute to the creation of the final product or service. Machinery, assembly lines, or specific production units within a factory are examples of production cost centers.

4. Service Cost Centre:

Service cost centers support the production process indirectly by providing various services or support functions necessary for the smooth operation of production units. This can include maintenance departments, quality control labs, or administrative support units that don't directly produce goods but assist in the production process.

5. Operation Cost Centre:

Operation cost centers are segments or units within an organization that are focused on specific operational activities or processes. They could involve different stages of a production process or distinct operational functions within the organization, like packaging, inspection, or testing.

6. Process Cost Centre:

Process cost centers represent segments within an organization that focus on a particular stage or step in the production process. For example, in a manufacturing plant, different stages like mixing, heating, or refining might be considered process cost centers where specific activities take place.