Saturday, January 23, 2010

Cost Unit and Cost Center

Cost Unit and Cost Center
The technique of costing involves the following:
  • Collection and classification of expenditure according to cost elements
  • Allocation and apportionment of the expenditure to the cost centers or cost units or both
Cost Unit
While preparing cost accounts, it becomes necessary to select a unit with which expenditure may be identified. The quantity upon which cost can be conveniently allocated is known as a unit of cost or cost unit. The Chartered Institute of Management Accountants, London defines a unit of cost as a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed.
Unit selected should be unambiguous, simple and commonly used. Following are the examples of units of cost:
(i) Brick works
per 1000 bricks made
(ii) Collieries
per ton of coal raised
(iii) Textile mills
per yard or per lb. of cloth manufac- tured or yarn spun
(iv) Electrical companies        
per unit of electricity generated
(v) Transport companies        
per passenger km.
(vi) Steel mills
per ton of steel made
Cost Center
According to the Chartered Institute of Management Accountants, London, cost center means “a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of cost control.” Thus, cost center refers to one of the convenient units into which the whole factory or an organization has been appropriately divided for costing purposes. Each such unit consists of a department, a sub-department or an item or equipment or machinery and a person or a group of persons. Sometimes, closely associated departments are combined together and considered as one unit for costing purposes. For example, in a laundry, activities such as collecting, sorting, marking and washing of clothes are performed. Each activity may be considered as a separate cost center and all costs relating to a particular cost center may be found out separately.
Cost centers may be classified as follows:
  • Productive, unproductive and mixed cost centers
  • Personal and impersonal cost centers
  • Operation and process cost centers
Productive cost centers are those which are actually engaged in making products. Service or unproductive cost centers do not make the products but act as the essential aids for the productive centers. The examples of such service centers are as follows:
  • Administration department
  • Repairs and maintenance department
  • Stores and drawing office department
Mixed costs centers are those which are engaged sometimes on productive and other times on service works. For example, a tool shop serves as a productive cost center when it manufactures dies and jigs to be charged to specific jobs or orders but serves as servicing cost center when it does repairs for the factory.
Impersonal cost center is one which consists of a department, a plant or an item of equipment whereas a personal cost center consists of a person or a group of persons. In case a cost center consists of those machines or persons which carry out the same operation, it is termed as operation cost center. If a cost center consists of a continuous sequence of operations, it is called process cost center.
In case of an operation cost center, cost is analyzed and related to a series of operations in sequence such as in chemical industries, oil refineries and other process industries. The objective of such an analysis is to ascertain the cost of each operation irrespective of its location inside the factory.

1 comment:

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