Cost Centre and Cost Unit – Introduction, Definition and FAQs (2024)

Even though cost centre and cost unit are two independent terms, they are intertwined and necessary for cost control in a company. A cost unit is the measurement medium whereas a cost centre refers to a subdivision, location, department, or other institution.

The marketing department, Research & Development department, and other cost centres are examples of cost centres. Metre, kilometre, gallon, and other cost units are examples of cost units.

The first phase in the cost analysis process is to identify the cost centres, and the second is to assess the costs of those departments using the cost units determined by top management. Cost centres produce profit through operational efficiency, but they do not directly contribute. The cost unit aids in the quantification of these departments' costs.

Cost centres are primarily developed to assist management in operations like budgeting, strategic planning, decision-making, and control. Cost unit, on the other hand, serves no such purpose because it is simply a way of expressing cost.

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 organisation, 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 organisation of the factory, availability of information, size and structure of the firm, the provision of costing, condition of incidence, and others.

Define 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 organisation but incur expenses. This is a type of responsibility centre that is accountable for incurring expenses that are under their control. It indicates any section of the organisation’s product or service for which specific cost collection is looked for.

A cost centre, according to the Institute of Cost and Management Accountants (ICMA), is a location, person, or item of equipment (or a combination of these) for which costs can be determined and utilised for cost control.

A cost centre, in other words, is any location, person, machine, section, part, activity, or function inside an organisation or enterprise where expenses are gathered or aggregated and assigned.

Given the foregoing, a cost centre is a natural division of an organisation that aids in the measurement and understanding of operating costs as well as the application of costs to goods.

The simplicity of cost accumulation, comparability, and cost control are all factors that go into forming a cost centre in a corporation. A person, machine, or department will be classified as a cost centre if costs accumulate for that entity.

Cost centres can be separated into two categories in a project:

1. Production cost centres

2. Service cost centres

Cost Centre Example-

The research and development wing (R&D) is responsible for developing new techniques and products for the organisation. 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 metre, etc. a complex unit uses a combination of two simple units like per kilowatt-hour, per tonne-kilometre, etc.

Difference Between Cost Centre and Cost Unit: Tabular Format

The main difference between cost centre and cost unit is that the cost centre costs the 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:

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 splitting 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.