Cost Centre and Cost Unit

For cost to be ascertained and controlled in a meaningful way, an organisation needs to identify exactly where costs are incurred and in what unit they should be expressed. These two ideas — Cost Centre and Cost Unit — are the building blocks every costing system is organised around.

A cost centre is a convenient sub-division of the whole organisation for cost purposes — instead of treating the entire factory as one lump of expenditure, costs are collected against smaller, identifiable centres so that responsibility and efficiency can be tracked centre by centre. Cost centres are commonly grouped as:

• Personal Cost Centre — a person or a group of persons, e.g. a works manager, a sales team.
• Impersonal Cost Centre — a location or an item of equipment, e.g. a machine, a department, a stores yard.
• Production Cost Centre — a centre where the actual manufacturing/processing operation is carried out, e.g. the spinning department of a textile mill, the machining shop of an engineering unit.
• Service Cost Centre — a centre that renders services to production cost centres rather than manufacturing anything itself, e.g. the power house, the canteen, the maintenance department, the stores department.

Different industries naturally set up different cost centres depending on their own process — a sugar mill may organise its cost centres as the cane-crushing house, the boiling house, and the packing section; a hospital may use the operation theatre, the pathology laboratory, and the general ward as its cost centres.

While a cost centre answers "where was the cost incurred?", a cost unit answers "cost per what?" — it is the yardstick used to express an otherwise large, aggregate cost figure in a comparable, per-unit form. The cost unit chosen naturally depends on the nature of the output: