Skip to main content

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.

Labels:

Comments

Post a Comment

Popular posts from this blog

The Finance Journey of Aarav’s Café

Aarav, a young entrepreneur, always dreamed of owning a coffee shop. He was confident about his coffee making skills, but soon realized that turning this dream into reality required more than passion, it required finance. Finance, he learned, is the art and science of managing money: planning, raising, investing, and controlling financial resources to achieve business goals. When starting his venture, Aarav explored various types of business structures. He considered a sole proprietorship for its simplicity and control but noted the drawback of unlimited personal liability. Partnerships offered shared responsibility and resources but also shared risks. A private limited company, though more regulated, provided limited liability and made it easier to raise funds. Aarav decided to register his café as a private limited company, keeping future expansion in mind. Very quickly, he discovered that finance is the lifeblood of any business. It is needed before operations begin, to purchase...
Post a Comment
Read more

📖 The Story of Sutra Café: Understanding Financial Statements

  📖 The Story of Sutra Café: Understanding Financial Statements Ravi, Meera, and Arjun had always dreamt of running a small business together. After finishing their studies, they decided to open a cozy little café near their college campus. They named it Sutra Café , believing that it would weave together their passion for coffee, friendship, and entrepreneurship. In the very first month, their café was buzzing with customers—students, professors, and office-goers all loved their coffee and snacks. By the end of the month, the friends were excited to know whether they had really made money or not. But how could they be sure? Their mentor, Professor Shah , smiled and said, “Every business speaks the language of financial statements. If you learn to read this language, you’ll always know the true story of your café.” Income Statement – The Story of Profitability Professor Shah first taught them about the Income Statement , also called the Profit and Loss Statement . This...
Post a Comment
Read more

Basics of Cost Accounting - 9: Allocation, Apportionment and Reapportionment of Overheads

 Allocation, Apportionment and Reapportionment of Overheads           The objective of Cost Accounting is classifying costs and recording an appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for the purpose of control and guidance of management A) Allocation of Overheads When items of cost are identifiable directly with some products or departments such costs are charged to cost centres. This process is known as cost allocation. It is the charging of discrete, identifiable items of cost to cost centres or cost units.  It is complete distribution of an item of overhead to the departments or products on logical or equitable basis is called allocation.  Where a cost can be clearly identified with a cost centre or cost unit, then it can be allocated to that particular cost centre or unit.  Allocation is the process by which cost items are charg...
Post a Comment
Read more