A cost accountant has to ascertain cost by cost centre or cost unit or by both.
Cost Centre
According to the Chartered Institute of Management Accountants, London, cost centre means, “a production or service location, function, activity or item of equipment whose costs may be attributed to cost units”. Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. Thus cost centre refers to one of the convenient unit into which the whole factory organisation has been appropriately divided for costing purposes. Each such unit consists of a department or a sub-department or item of equipment or, machinery or a person or a group of persons. For example, although an assembly department may be supervised by one foreman, it may contain several assembly lines. Sometimes each assembly line is regarded as a separate cost centre with its own assistant foreman.
Cost Centers may be classified as follows:
- Productive, Unproductive and Mixed Cost Centers: Productive cost centers are those which are actually engaged in making the products the raw materials are handled here and converted into saleable products. In such centers both direct and indirect costs are incurred, machine shops, welding shops, and assembly shops are examples of production cost centers in an engineering factory. Service or unproductive cost centers do not make the products but are essential aids to the productive centers. Examples of such service centers are those of administration, repairs and maintenance, stores and drawing office departments. Mixed cost centers are those which are engaged some on productive and other lines on service works.
- Personal and Impersonal Cost Centre: A personal cost centre consists of a person or a group of persons. An impersonal cost centre is one which consists of a department, plant or item of equipment (or group of these).
- Operation and Process Cost Centre: In case a cost centre consists of those machines and/or persons which carry out the same operation is termed as operation cost centre. If a cost centre consists of a continuous sequence of operations it is called process cost centre.
The determination of a suitable cost centre is very important for ascertainment and control of cost. The manager in charge of a cost centre is held responsible for control of cost of his cost centre.
Cost Unit
The Chartered Institute of Management Accountants, London, defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”. A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions. These smaller sub-divisions are attributed to products or services to determine product cost or service cost or cost of time spent for a particular job etc. We may for instance determine the cost per ton of steel, per ton kilometer of a transport service or cost per machine hour. The forms of measurement used as cost units are usually the units of physical measurements like number, weight, area, length, value, time etc. Unit selected should be unambiguous, simple and commonly used.