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Cost Unit and Cost Center

Cost unit

The Institute of Cost and 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.” It is a unit of quantity in terms of which costs may be computed.

The terms of measurement used in cost unit are:

(i) Number
(ii) Area
(iii) Volume
(iv) Length
(v) Weight
(vi) Time
(vii) value

Cost unit is always selected very carefully which depends on the nature of business operations.
The cost unit of steal is naturally ascertained in terms of per tonne. Cost of carrying a passenger by a transporter shall naturally be ascertained
in cost unit of kilometer.

The following are examples in certain cases:

Brick Industries Cost Unit per 1000 bricks.
Coal Mines Cost Unit per quintal.
Cotton Mills Cost Unit per meter.
Electric Company Cost Unit per unit.
Transport Companies Cost Unit per kilometre.
Steel Companies Cost Unit per tonne.
Water Supply Cost Unit per 1000 litres
Furniture Industries Cost Unit per number
Oil Companies Cost Unit per litre.
Soap Factory Cost Unit per dozen, per, kilogram or per tablet.

Cost Center

Definition

The Institute of Cost and Management Accountants, London has defined cost center as “a location, a person or an item of equipment (or group of these) in or connected with an undertaking in relation to which costs may be ascertained and used for the purpose of cost control.”

It is a part of an enterprise to which costs can be charged. A cost center can be:

(1). A location—an area, e.g., a department, a sales area, a store yard etc.
(2) An Item of Equipment, e.g., a lathe, a machine, a delivery vehicle etc.
(3) A person, e.g., a salesman, a foreman etc.

Factors to Select a Suitable and Effective Cost Center

The selection of a suitable cost center depends on the following factors :
(a) Layout and organization of a factory:
(b) Availability of various cost data and information.
(c) The policy of the management in respect of selection of cost centers.

Classifications of Cost Center

Cost centers can easily be classified under the following three broad heads:

1. Productive, Unproductive and Mixed Cost Centres.

Factories may opt for productive cost center while administrative wing go for unproductive cost center and tool department may have a mixed cost center.

2. Personal and Impersonal Cost Center.

When the plant or a machine is taken as a unit it is the impersonal cost center and when the person or a group of persons are a unit the personal cost center is implied. “Impersonal cost centre consists of a location of item of equipment whereas personal cost center consists of a person or a group of persons,” asserts I.C.M.A., London.

3. Operation and Process Cost Center.

According to I.C.M.A., London the “operation cost center is a center which consists of those machines and/or persons which carry out the same operations,” and “process cost center is a cost center which consists of a continuous sequence of operations.

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