COST CENTRE AND COST UNIT

A cost accountant has to ascertain cost cost centre or cost unit or both.
Cost Centre
According to the Chartered Institute of Management Accountants, London, cost centre means, “a production or
service location, function, activity or item of equipment whose costs may be attributed to cost units”. Cost centre
is the smallest organisational sub-unit for which separate cost collection is attempted. Thus cost centre refers to
one of the convenient unit into which the whole factory organisation has been appropriately divided for costing
purposes. Each such unit consists of a department or a sub-department or item of equipment or, machinery or
a person or a group of persons. For example, although an assembly department may be supervised one
foreman, it may contain several assembly lines. Sometimes each assembly line is regarded as a separate cost
centre with its own assistant foreman. Take another example, in a laundry, activities such as collecting, sorting,
marketing and washing of clothes are performed. Each activity may be considered as a separate cost centre
and all costs relating to a particular cost centre may be found out separately.
Cost centres may be classified as follows :
(i) Productive, Unproductive and Mixed Cost Centres: Productive cost centres are those which are
actually engaged in making the products – the raw materials are handled here and converted into
saleable products. In such centres both direct and indirect costs are incurred, machine shops,
welding shops, and assembly shops are examples of production cost centres in an engineering
factory. Service or unproductive cost centres do not make the products but are essential aids to the
productive centres. Examples of such service centres are those of administration, repairs and
maintenance, stores and drawing office departments. Mixed cost centres are those which are
A cost which does not involve any cash outflow is called_______ or
____________
Correct answer: Notional cost, Imputed cost engaged some on productive and other lines on service works. For instance, a tool shop serves as a productive cost centre when it manufactures dies and jigs for specific order, but serves as servicing cost centre when it does repairs for the factory.
(ii) Personal and Impersonal Cost Centre: A personal cost centre consists of a person or a group of persons. An impersonal cost centre is one which consists of a department, plant or item of equipment (or group of these).
(iii) Operation and Process Cost Centre: In case a cost centre consists of those machines and/or persons which carry out the same operation is termed as operation cost centre. If a cost centre consists of a continuous sequence of operations it is called process cost centre.
The determination of a suitable cost centre is very important for ascertainment and control of cost. The manager in charge of a cost centre is held responsible for control of cost of his cost centre.
Cost Unit
The Chartered Institute of Management Accountants, London, defines a unit of cost as “a unit of product or
service in relation to which costs are ascertained”. A cost unit is a devise for the purpose of breaking up or
separating costs into smaller sub-divisions. These smaller sub-divisions are attributed to products or services
to determine product cost or service cost or cost of time spent for a particular job etc. We may for instance
determine the cost per ton of steel, per tonne kilometre of a transport service or cost per machine hour. The
forms of measurement used as cost units are usually the units of physical measurements like number,
weight, area, length, value, time etc. Unit selected should be unambiguous, simple and commonly used.

The selection of suitable cost centres or cost units for which costs are to be ascertained in an undertaking
depends upon a number of factors which are listed as follows:
(i) Organisation of the factory.
(ii) Conditions of incidence of cost.
(iii) Requirements of the costing system i.e. suitability of the units of centres for cost purposes.
(iv) Availability of information.
(v) Management policy regarding making a particular choice from several alternatives.

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