An accountant needs to ascertain the cost of the cost object (i.e. product, service or activity) either by cost centre, cost unit or by both. Cost Center is nothing but just one portion of the entire organization, to which cost is charged. On the other hand, Cost unit refers to the unit in which cost is expressed.
The choice of an appropriate cost centre or cost unit, for which cost is assessed is based on various factors like the organization of factory, size and structure of the concern, availability of information, the requirement of costing, condition of incidence and the policy of the management with respect to the selection of a method out of different alternatives.
In this article excerpt, we are going to discuss the differences between cost centre and cost unit.
Content: Cost Centre Vs Cost Unit
Comparison Chart
| Basis for Comparison | Cost Centre | Cost Unit |
|---|---|---|
| Meaning | Cost centre refers to a subdivision or any part of the organization, to which costs are incurred, but does not contribute to the company's revenues directly. | Cost unit implies any measurable unit of product or service, with respect to which costs are assessed. |
| Use | It is used as a basis for classifying costs. | It is used as a standard for making a comparison. |
| Cost | Costs are collected and absorbed by cost units. | Measured and Expressed in terms of cost units. |
| Ascertainment | Ascertained as per the nature and technique of production process, organization size and structure. | Ascertained as per the nature of the final output and the existing trade practices. |
| Sequence | First | Second |
| How many? | Several cost centres are there, even if there is just one product or service offered. | Different cost units for different products or services. |
Definition of Cost Centre
A cost centre is a type of responsibility centre that is called accountable for the incurrence of the costs, which are under its control. It indicates any part of the organization i.e. product or service location, activity, person, function or item whose cost is assigned to the cost units, for accounting purposes. It is the small part of the organization for which specific cost collection is sought.
Simply put, cost centre indicates a conducive unit of the organization, into which the entire factory is aptly divided for the purpose of costing, wherein each unit comprises the department, equipment, item, machinery, etc.
The ascertainment of the appropriate cost centre and the assessment of cost under cost centre facilitates periodical comparison and cost control. Hence, to find out the cost of product or service, expenses must be correctly apportioned to the cost centre. There are two types of Cost Centres:
- Standard Cost Centre: The type of Cost Centre in which the input-output ratio can be easily defined. Here, the produce, i.e. output is quantifiable and input is needed for determining the output. Hence, on the basis of logical analysis, an estimate of standard units of input to create one unit of output is fixed. Further, a comparison is made between the actual cost of production with the standard one and if there are any variances, then they are bifurcated into controllable and uncontrollable costs.
- Discretionary Cost Centre: The type of cost centre whose input-output ratio cannot be defined because the output is not quantifiable is called discretionary cost centre. In this way, the comparison is made between the cost of production and the allocated amount for completing the activity or job.
The manager of the cost centre is accountable for controlling the cost of the cost centre. The performance is measured on the basis of predetermined standards or budgets. It indirectly adds to the company’s profit by way of operational efficiency.
Definition of Cost Unit
Cost unit is said to be the unit of product, service, activity, time or combination thereof, in connection to which costs are determined. While preparing cost statements and accounts, a specific measurement unit is required to be chosen, so as to identify the expenses accurately and allocate the cost conveniently and in this way, cost unit comes into the picture.
Cost units are units of physical measurement such as area, weight, volume, value, time or number, which are to be chosen to facilitate comparison amidst standard cost and the actual cost of the product or service.
Cost unit is a quantitative factor used for the purpose of dividing or segregating costs into various sub-divisions, which are applicable to the product or service, to know the cost of product, service or time consumed in a particular job. Some examples of cost units with respect to the product or service is given hereunder:
| Product/Service | Cost Unit |
|---|---|
| Steel | Ton |
| Oil | Liter, Gallon |
| Automobile | Number |
| Chemical | Liter, kilogram, ton, etc. |
| Power/Electricity | Kilo-watt hour (kWh) |
| Transport | Kilometer |
| Cement | Ton/ per bag, etc. |
| Hotel | Room |
| Hospital | Patient/day |
Key Differences Between Cost Centre and Cost Unit
The difference between the cost centre and cost unit are discussed in the points given below:
- Cost Centre means any location, department, person or equipment within the organization, which is regarded as accountable for incurring costs. On the contrary, Cost unit can be described as a measurable constituent of a product or service, for which cost is computed.
- Cost centre acts as a basis for classifying costs, whereas cost unit serves as a measure for making a comparison, between the standard and actual cost.
- Cost centres are determined on the basis of the nature and techniques of the production process, organization size and structure. In contrast, cost units are based on the nature of the final output and the existing trade practices in the industry.
- Cost centre collects the costs, which are absorbed by the cost unit. Conversely, Cost Units measures and expresses the cost of the product in terms of cost units.
- First of all, the entire organization is divided into various cost centres to ascertain the costs, after which they are absorbed by the cost units.
- Even if an organization produces a single product or offers just one service, they may be having several cost centres. As against, there are different cost units for different products or services.
Conclusion
Basically, cost centres are established for helping the management in the activities like budgeting, strategic planning, decision making and controlling. On the flip side, cost unit has no such role to play, as it is just a measure of expressing cost.
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