Q.Define cost centre and cost unit. Give two examples of each and distinguish between the two.

Cost centre and cost unit are two basic ideas that answer, respectively, where cost is collected and in terms of what it is measured.

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. It is the part of the business to which costs are charged and against which a manager can be held responsible. Cost centres may be personal (a person or group, e.g. a works manager) or impersonal (a location or equipment, e.g. a department or a machine); and production cost centres (where work is done on the product) or service cost centres (which support production, e.g. the maintenance or stores department).

Examples: (i) the machining department of a factory; (ii) a particular machine or group of machines.

Cost unit. A cost unit is a unit of product, service or time (or a combination) in terms of which cost is ascertained or expressed. It is the measuring rod for cost, and the right unit differs from industry to industry.

Examples: (i) per tonne (or per bag) in a cement works; (ii) per kilowatt-hour (kWh) for electricity; (or per passenger-kilometre in transport).

Distinction between the two.

The commonest error is swapping the two — describing a department as a cost unit or 'per tonne' as a cost centre. Remember: a cost centre is a place/person (where c …