The Difference between Cost Centre and Cost Unit

A product or service, a project, a department, or any activity to which a cost corresponds is referred to as a cost object. To be more meaningful, the term ‘cost’ should always be associated with a cost object. A sound costing system requires the establishment of a meaningful cost object. This cost object can be defined in a variety of ways. A cost object may be referred to as a Cost Centre in a broader sense, or it can be described as a Cost Unit at the lowest level in a narrow sense. In this blog, we shall be throwing light on the difference between cost centre and cost unit.

Breaking down Cost Centre

The Chartered Institute of Management Accountants (CIMA) defines a Cost Centre as “a location, a person, or an item of equipment (or a group of them) in or connected with an undertaking, in relation to which costs are ascertained and used for the purpose of cost control”.

In other words, for any organization, the smallest sub-unit for which separate cost collection is attempted is known as a Cost Centre. It may be a warehouse, a department, a machine in the factory, or an individual. Once the cost of a Cost Centre, such as a manufacturing or service location, function, activity, or piece of equipment, has been determined, it can then be assigned to cost units. This further enables the cost of products or services to be properly ascertained.

The identification of appropriate cost centres, as well as analysis of cost within cost centres, is extremely beneficial for cost comparison and control on a regular basis. Expenses should be appropriately segregated to cost centres in order to derive the cost of a product or service. Once the expenses are assigned to cost centres, they are attributed to cost units (products or services) on a suitable basis depending upon the consumption of resources involved in a particular product or service. In addition, the manager of a cost centre is held accountable for the cost control of his cost centre.

There are two kinds of cost centres: personal cost centres and impersonal cost centres. An individual or a group of people constitutes a personal cost centre. An impersonal cost centre may be a site or location, a piece of equipment, or a set of pieces of equipment.

In a manufacturing company, cost centres often follow the pattern or layout of the factory’s departments or sections, and as a result, there are two primary types of cost centres in a manufacturing company. These are production and service cost centres.

Production Cost Centre: These centres are involved in the production or related work, i.e., conversion of raw materials into finished products. Examples of these centres are machine shops, welding shops, and so on.

Service Cost Centre: These are those centres that are ancillary to and provide service to production cost centres. Examples may be Plant Maintenance, Administration, etc.

Breaking down Cost Unit

While a cost centre corresponds to the ascertainment of costs on a broader level, a cost unit is much narrower. A cost unit is a tool that is used for the purpose of breaking up or separating costs into smaller sub-divisions that are easily attributable to products or services.

In simple words, a cost unit may be referred to as a unit of product or service in relation to which the costs are ascertained. Thus, it is the narrowest possible level of the cost object.

It is the unit of quantity of a product, service, or time (or perhaps some combination of these) in reference to which costs can be calculated or stated. For example, we may calculate the cost of a service per tonne of steel, per tonne-kilometre of transportation, or per machine hour.

Moreover, sometimes a single order or contract can be represented as a cost unit (known as a job). A batch can also be considered a cost unit if it consists of a collection of similar items and maintains its identity during one or more stages of production.

Here are some examples of cost units in any business:

Industry / ProductCost Unit
AutomobileNumber of vehicles
CableMetres / kilometres
CementTonne
Chemicals / FertilizersLitre / Kilogram / tonne
GasCubic Metre
Power – ElectricityKilowatt Hour
TransportTonne-Kilometre, Passenger-Kilometre
HospitalPatient Day
HotelBeds or days of stay
EducationStudent year
TelecomNumber of Calls
BPO ServiceAccounts handled
Professional ServiceChargeable Hours

Differences between the two

From the above discussion, the terms Cost Centre and Cost Unit may be distinguished on the following grounds:

Basis of differenceCost CentreCost Unit
MeaningA cost centre refers to the smallest segment or activity or area of responsibility in respect of which costs are determined.A cost unit is a quantifiable unit of product or service in reference to which costs are stated and determined.
ScopeA cost centre is a subset of the overall organization.A cost unit is a unit of measurement for expressing cost.
Cost determinationA cost centre assists in determining costs by location, person, department, and so on.A cost unit is used for the sub-division of costs that may be attributed to the products or services.
ApplicationBefore applying the cost unit, a cost centre is created.After the functions of creating cost centres have been completed, the application of cost units occurs.
NumberEven if a company manufactures only one product (or provides only one service), it may have multiple cost centres.  

The number and size of cost centres vary from one company to another and are determined by the level of expenditure involved as well as the management’s control requirements.
A cost unit is a unit of measurement that is assigned to a single product or service.

Conclusion

A cost accountant in an organization is required to determine the costs by cost centre or cost unit or by both. The selection of appropriate cost centres or cost units for which costs are to be determined in an undertaking is influenced by a number of factors, including the structure of a factory, incurrence of cost, the availability of information, costing requirements, and management policy for selecting a method from a variety of options.


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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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