The top management of the company always laid down precise guidelines for such departments to prevent the cost from crossing the specific amount. 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. 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. 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.
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. Scope It offers a wider scope of the study.
On the other hand, Cost unit refers to the unit in which cost is expressed. The choice of an appropriate cost centre or cost unit, for which cost is assessed is based on various factors like the organization of factory, size and structure of the concern, availability of information, the requirement of costing, condition of incidence and the policy of the management with respect to the selection of a method out of different alternatives.
In this article excerpt, we are going to discuss the differences between cost centre and cost unit. Basis for Comparison Cost Centre Cost Unit Meaning Cost centre refers to a subdivision or any part of the organization, to which costs are incurred, but does not contribute to the company's revenues directly.
Cost unit implies any measurable unit of product or service, with respect to which costs are assessed. Use It is used as a basis for classifying costs. It is used as a standard for making a comparison. Cost Costs are collected and absorbed by cost units. Measured and Expressed in terms of cost units. Ascertainment Ascertained as per the nature and technique of production process, organization size and structure.
Ascertained as per the nature of the final output and the existing trade practices. Sequence First Second How many? Several cost centres are there, even if there is just one product or service offered.
Different cost units for different products or services. A cost centre is a type of responsibility centre that is called accountable for the incurrence of the costs, which are under its control. The Institute of Cost and Management Accountants ICMA , which is based in London, defined a cost center a location, person, or item of equipment or a group of these for which costs may be ascertained and used for the purposes of cost control. Given the above, a cost center is, therefore, a natural division of an undertaking that helps to measure and understand operational costs and apply costs to products.
A cost center in a company is formed by considering the convenience of cost accumulation , comparability , and cost control. If costs are accumulated for a person, machine, or department, then this entity will be treated as a cost center.
In an undertaking, cost centers may be divided into two parts:. A production cost center refers to a cost center that is engaged in regular production e. A service cost center is a center that is not engaged in regular production, but which assists the production cost centers in implementing their activities e.
Cost centers can also be divided into operation cost centers and process cost centers, as well as personal cost centers and impersonal cost centers. A personal cost center is a cost center that consists of a person or group of persons e. An impersonal cost center refers to a cost center that consists of a location, item of equipment, or a group of these e.
The selection of a suitable cost center depends on several factors, including:. Cost centers can be classified under the following three broad areas:. Factories might choose productive cost centers whereas an administrative wing might choose an unproductive cost center.
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