Cost units, Cost centre and Profit centre

Cost units- 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”.

The forms of measurement used as cost units are usually the units of physical measurements like number, weight, area, length, value, time etc.

Cost centre – According to Chartered Institute of Management Accountants, London, cost centre 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”. Cost centre is the smallest organizational sub- unit for which separate cost collection is attempted. Thus cost centre refers to one of the convenient unit into which the whole factory organization 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. Some times each assembly line is regarded as a separate cost centre with its own assistant foreman.

Cost centres may be classified as follows :

(i)                 Productive, Unproductive and Mixed Cost Centres: Productive cost centres are those which are actually engaged in making the products - the raw materials are handled here and converted into saleable products. In such centres both direct and indirect costs are incurred, machine shops, welding shops, and assembly shops are examples of production cost centres in an engineering factory. Service or unproductive cost centres do not make the products but are essential aids to the productive centres. Examples of such service centres are those of administration, repairs and maintenance, stores and drawing office departments. Mixed cost centres are those which are engaged some on productive and other lines on service works. For instance, a tool shop serves as a productive cost centre when it manufactures dies and jigs for specific order, but serves as servicing cost centre when it does repairs for the factory.

(ii)               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).

(iii)             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.

Profit centre – A profit centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. Profit centres are created to delegate responsibility to individuals and measure their performance.

Reference: 

Cost Accounting by Reddy and Hari Prasad Reddy

Cost Accounting by  Jain and Narang

ICAI
ICSI