Overheads

Cost Unit and Cost Centre

In cost accounting, understanding the concepts of cost units and cost centers is crucial for accurate cost tracking, analysis, and control.

Cost Unit

A cost unit is a measure of quantity of product or service output. It represents the unit of measurement for which costs are collected and expressed. It's the basis for conveniently allocating expenditure. The selection of an appropriate cost unit depends on the nature of the industry and the type of product or service being offered.

• Definition: The quantity upon which expenditure can be conveniently allocated.

• Examples:

  • Textile Mills: per yard or meter of cloth manufactured
  • Transport Companies: per passenger-kilometer (passenger-km)
  • Steel Mills: per tonne of steel made
  • Electricity Companies: per kilowatt-hour (kWh) of electricity generated
  • Cement Industry: per ton of cement
  • Hotel: per room-night
  • Hospital: per patient-day

The cost unit allows businesses to express costs in relation to a specific, measurable output. This is essential for calculating unit costs, pricing decisions, and performance evaluation.

Cost Centre

A cost centre is a segment or department within an organization for which costs are collected and assigned. Managers of cost centers are held accountable for the costs incurred within their respective centers but are not responsible for generating revenue. The focus is on cost control.

• Definition: A segment of an organization for which managers are responsible for cost control but not revenue generation.

• Examples:

  • Production departments (e.g., machining department, assembly department)
  • Service departments (e.g., maintenance department, IT department)
  • Support functions (e.g., human resources, accounting)

Cost centers are established to facilitate cost management and control. By assigning responsibility for costs to specific managers, organizations can improve accountability and encourage cost efficiency. Performance in cost centers is evaluated by comparing budgeted costs with actual costs. This variance analysis helps identify areas where costs are exceeding targets and allows for corrective action.

Key Differences Summarized

Feature	Cost Unit	Cost Centre
Definition	Unit of measurement for cost	Segment of an organization responsible for cost control
Purpose	Measure and allocate costs to output	Control and manage costs within a department or segment
Focus	Quantity of output	Area of responsibility
Responsibility	No specific individual responsible	Manager responsible for cost control

Understanding both cost units and cost centers is crucial for effective cost management. Cost units provide a basis for measuring and allocating costs to products or services, while cost centers provide a framework for controlling and managing costs within the organization. The information generated from tracking costs by unit and center is used for decision-making, performance evaluation, and cost control.