Cost Centre and Cost Unit

To ascertain and control cost, a business must decide where costs are being incurred and to what they are to be attached. This is where the ideas of a cost centre and a cost unit come in — two of the most fundamental building blocks of cost accounting.

Cost centre. A cost centre is a location, a person, an item of equipment, or a group of these, for which costs are ascertained and used for the purpose of cost control. In other words, it is a defined part of the business to which costs can be charged and against which a manager can be held responsible. Cost centres are broadly of two kinds:

• Personal cost centre — a cost centre that consists of a person or a group of persons, such as a works manager or a sales team.
• Impersonal cost centre — a cost centre that consists of a location or an item of equipment, such as a department, a machine, or a group of machines. A useful further split is between production cost centres (where the actual work on the product is done, e.g. the machining or assembly department) and service cost centres (which support production without working on the product directly, e.g. the maintenance, stores or canteen department).

Cost unit. A cost unit is a unit of product, service or time (or a combination of these) in terms of which cost is ascertained or expressed. It is the measuring rod against which cost is stated. The right cost unit differs from industry to industry — it must be one that is natural to the product or service concerned. For example: