Cost, Cost unit and Cost Centre (1)

Cost Accounting Overview

Cost Definition

  • Cost refers to the measurement, in monetary terms, of resources used in the production of goods or services.

  • It encompasses all expenses incurred (actual or notional) to ascertain the cost involved in a particular process or item.

Importance of Understanding Cost

  • Understanding costs is crucial for managing expenditures and improving profitability in a business.

  • Clear cost definitions help break down expenses for better analysis and control.

Cost Centres

Definition

  • Cost Centre: As defined by CIMA, it is a location, person, or piece of equipment connected with an undertaking, where costs are ascertained for cost control.

  • The purpose of cost centres lies in periodically comparing and controlling costs effectively.

Purpose & Determination

  • Segregation of Expenses: Expenses should be categorized to specific cost centres for accurate analysis.

  • Managers of cost centres are responsible for controlling costs associated with their respective centres.

  • Factors for determining suitable cost centres include:

    • Organization of the factory.

    • Condition of cost incidence.

    • Availability of information.

    • Management's policy regarding costing methods.

Types of Cost Centres

  • Personal Cost Centre: Comprises individuals or groups of individuals.

  • Impersonal Cost Centre: Involves locations or equipment.

  • Cost centres can be categorized further into:

    • Production Cost Centres: Engage in converting raw materials into finished products (e.g., machine shop).

    • Service Cost Centres: Support production cost centres (e.g., plant maintenance).

Responsibility Centres

Definition

  • Responsibility Centre: A segment of the organization assigned to a specific individual for oversight and performance evaluation.

  • Supervisors may be responsible for managing costs at these centres and assessing performance based on activity levels.

Types of Responsibility Centres

  • Profit Centre: In charge of managing both revenues and costs associated with a product or service, focusing on profitability.

  • Investment Centre: A specialized profit centre that is also responsible for investments related to its operations.

Cost Units

Definition

  • A Cost Unit is a measurement tool for dividing costs into smaller subdivisions specific to products or services.

  • It is defined as the unit of product, service, or time for which costs are calculated.

Types of Cost Units

  • Cost units can be expressed in various forms related to the nature of the product/service, such as:

    • Automobile: Number of vehicles.

    • Cable: Metres or kilometres.

    • Cement: Tonne.

    • Chemicals/Fertilizers: Litre/Kilogram/Tonne.

    • Gas: Cubic Metre.

    • Power - Electricity: Kilowatt Hour.

    • Transport: Tonne-Kilometre, Passenger-Kilometre.

    • Hospital: Patient Day.

    • Hotel: Bed Night.

    • Education: Student Year.

    • Telecom: Number of Calls.

    • BPO Services: Accounts Handled.

    • Professional Services: Chargeable Hours.

Examples of Usage

  • Cost units help businesses determine precise service costs, enabling better budgeting and financial planning.