Cost Centre and Cost Unit

Bookmark added to your notes.
View Notes
×

Introduction to Cost Centre and Cost Unit

In cost techniques, two types of important activities are involved. This is the classification and collection of expenditure based on cost elements. Another is the allocation and apportionment of the expenditure for both the cost centre and cost unit. An accountant needs to assert the cost of different objects in the system of cost accounting. The cost centre meaning is one portion of the whole organization, to which the cost is charged. On the contrary, cost unit or unit cost refers to a unit in which cost is measured or expressed. The selection of the suitable cost centre or cost unit is evaluated based on several factors like the organization of the factory, availability of information, size and structure of the firm, the provision of costing, condition of incidence, and others. 

[Image will be Uploaded Soon]


The main difference between cost centre and cost unit is that the cost centre cost incurring section of the firm. While the cost unit is the way cost is expressed or measured in terms of a specific commodity or service. The difference is shown further below in the table:


Difference Between Cost Centre and Cost Unit

Comparison Parameter

Cost Centre

Cost Unit

Definition 

Cost centre definition relates to the cost incurring subdivision or part of the firm, that doesn’t contribute directly to the organization’s revenue.  

The cost unit is defined as the measurable unit of the products and services with which the cost is associated. 

Scope

It offers a wider scope of the study.

It offers a narrow scope of the study. 

Purpose

It helps to classify and define cost centres. 

It acts as a standard medium for comparison. 

Sequence 

It comes first in the process of cost analysis.

It comes after the cost centre. 

Number

There can be many cost centres even if one product or service is offered. 

There are different unit cost for every product and service. 

Ascertainment

It is ascertained according to the nature of production, size, and structure of the firm. 

It is ascertained according to the nature of the final output and current trade practices. 


What is a Cost Centre? 

In simple terms, you can define the cost centre as the one or more units of the firm that don’t contribute directly to the process of revenue generation in an organization but incur expenses. This is a type of responsibility centre that is accountable for incurring expenses that are under the control. It indicates any section of the organization’s product or service for which specific cost collection is looked for. 


Cost Centre Example- 

The research and development wing (R&D) is responsible for developing new techniques and products for the organization. This department incurs a lot of expenses while comping up with new ideas, technologies, and products. There is no revenue generated for the department because the credits are transferred to the sales department for selling the products. 


The cost centre meaning is important so that it doesn’t take over the profits of the company. The top management of the company always laid down precise guidelines for such departments to prevent the cost from crossing the specific amount. 


Define 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. A simple unit represents a single standard measurement like per kilogram, per piece, per meter, etc. a complex unit uses a combination of two simple units like per kilowatt-hour, per tonne-kilometre, etc. 


Did You Know?

The most important function of the cost centre is the tracking of expenses associated with a specific function. For instance, when a company treats its customer support centre as a separate unit, it can measure how much it is spending after its support service. In the absence of a cost centre, it will take immense effort to measure the cost of supplying this service. This will require to split the company’s total phone bills by department. A cost centre smoothens the process, allowing management to measure, budget, and control costs for specific functions the business performs. Cost centre in cost accounting plays a vital role in assisting the management in computing financial accomplishment. 

FAQ (Frequently Asked Questions)

Q1. What are the Types of Cost Centres?

Ans. The types of cost centre we generally see are of seven varieties. The first is productive, unproductive, and mixed cost centres. The productive cost centres are those cost centres that are involved in making the products. Unproductive or service costs don’t make the product but are essential aids in the production centre. The mixed costs centres refer to those that are engaged in productive and some other line of service. The personal cost centre includes an individual or group of individuals. The impersonal cost centre includes a plant, department, or item of equipment. An operation cost centre consists of those machines and/or persons who carry out the same operation. A process cost centre includes a continuous sequence of operations.

Q2. What are the Measures in the Determination of Cost Per Unit?

Ans. The following steps will help to determine the cost per unit

(i) Recording all the overheads based on estimation. 

(ii) Categorizing all recorded overheads as fixed, variable, and mixed. 

(iii) Cost units charged under direct costs as these are directly attributable to cost units.

(iv) Designate or allocate all indirect cost to production or services cost centres

(v) Reallocate service cost and cost centres between production cost centres.

(vi) Calculate an estimated level of budget. 

(vii) Evaluate an overhead absorption (recovery) rate by dividing the total budgeted overheads by the total budgeted activity level.

(viii) Designate production overheads to production units by applying overhead rate.

(ix) Calculate total costs by adding direct and indirect costs of production.