Cost Centre vs. Cost Unit: Know the Difference
By Shumaila Saeed || Published on January 15, 2024
Cost Centre is a department or segment within an organization where costs are accumulated and recorded. Cost Unit is a unit of product, service, or time in relation to which costs are ascertained.
Key Differences
A Cost Centre in an organization refers to a department or location where costs are incurred and recorded. Its primary function is to accumulate and track expenses, providing insight into where a business is spending money. A Cost Unit, on the other hand, represents a standard measurement for which the cost of production is calculated, such as per unit of product, service, or time.
Shumaila Saeed
Jan 15, 2024
The concept of a Cost Centre is central to cost accounting and control. It helps in identifying areas of high expenditure and aids in budget management. Cost Units, conversely, are used to determine the cost of producing a specific amount of a product or service, facilitating cost control and pricing strategies.
Shumaila Saeed
Jan 15, 2024
Cost Centres are integral to internal management strategies, enabling organizations to assess the efficiency of different departments. In contrast, Cost Units are vital for external financial reporting and decision-making, assisting in setting prices and evaluating profitability.
Shumaila Saeed
Jan 15, 2024
Cost Centres have a broader scope, encompassing various departments or segments of a business. Cost Units are more specific, applying to individual products, services, or time periods, making them essential for unit cost calculation.
Shumaila Saeed
Jan 15, 2024
For instance, a manufacturing department is a Cost Centre, where all costs related to manufacturing are collected. A Cost Unit might be one manufactured item, where the cost per unit is calculated based on total production costs.
Shumaila Saeed
Jan 15, 2024
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Comparison Chart
Definition
A department where costs are accumulated
A measurement unit for ascertaining costs
Shumaila Saeed
Jan 15, 2024
Purpose
To track and manage expenses in specific areas
To determine the cost per unit of product/service
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Jan 15, 2024
Role in Accounting
Used for internal cost control and budgeting
Used for pricing and profitability analysis
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Jan 15, 2024
Scope
Broad, covers departments or business segments
Specific, related to individual products or time
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Jan 15, 2024
Example
A research and development department
Cost per manufactured item or per service hour
Shumaila Saeed
Jan 15, 2024
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Cost Centre and Cost Unit Definitions
Cost Centre
A segment or department responsible for specific costs.
The production floor operates as an independent cost centre.
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Jan 08, 2024
Cost Unit
A measure used for ascertaining cost per unit of output.
The cost unit for the bakery was per loaf of bread.
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Jan 08, 2024
Cost Centre
A functional part of an organization with allocated costs.
The customer service division is a vital cost centre.
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Jan 08, 2024
Cost Unit
A basis for determining the cost of a specific product or service.
The cost unit in construction could be per square foot.
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Jan 08, 2024
Cost Centre
An area in a business where costs are tracked and analyzed.
The IT department was designated as a new cost centre.
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Jan 08, 2024
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Cost Unit
A standard measure for cost allocation in production.
The cost unit for software development is per license.
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Jan 08, 2024
Cost Centre
A unit within a company for accounting and cost control.
Each branch office is treated as a distinct cost centre.
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Jan 08, 2024
Cost Unit
A unit of product or service for cost calculation.
The hotel uses per room-night as the cost unit.
Shumaila Saeed
Jan 08, 2024
Cost Centre
A division within an organization where costs are collected.
The marketing department is considered a separate cost centre.
Shumaila Saeed
Jan 08, 2024
Cost Unit
A unit of quantity for calculating the cost of production.
In automobile manufacturing, the cost unit is per vehicle.
Shumaila Saeed
Jan 08, 2024
Repeatedly Asked Queries
What is a Cost Centre?
It's a department or area within a business where costs are accumulated and managed.
Shumaila Saeed
Jan 15, 2024
What is a Cost Unit?
A Cost Unit is a standard measure used to calculate the cost of a product or service.
Shumaila Saeed
Jan 15, 2024
How is a Cost Centre used in budgeting?
Cost Centres are used to allocate budgets and track expenses for specific departments.
Shumaila Saeed
Jan 15, 2024
Is a Cost Centre always a physical location?
Not necessarily; a Cost Centre can also be a functional area, not bound by physical location.
Shumaila Saeed
Jan 15, 2024
What's an example of a Cost Unit in manufacturing?
In manufacturing, a common Cost Unit is cost per item produced.
Shumaila Saeed
Jan 15, 2024
Can a company have multiple Cost Centres?
Yes, a company can have several Cost Centres, each representing different departments.
Shumaila Saeed
Jan 15, 2024
Do all businesses use Cost Centres?
Most businesses use Cost Centres, especially for internal accounting and management.
Shumaila Saeed
Jan 15, 2024
Is a Cost Unit applicable in non-manufacturing industries?
Yes, it's used in various industries, including services, to determine unit costs.
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Jan 15, 2024
How does a Cost Unit affect pricing?
Cost Units help determine the cost per unit, which is crucial for setting product prices.
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Jan 15, 2024
Can a project be a Cost Centre?
Yes, a specific project can function as a Cost Centre for cost tracking.
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Jan 15, 2024
Are Cost Units important for profitability analysis?
Yes, they help in analyzing the profitability of different products or services.
Shumaila Saeed
Jan 15, 2024
How is a Cost Unit determined?
It's based on the nature of the product or service, like per unit, per hour, etc.
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Jan 15, 2024
Can a Cost Centre be a source of profit?
While not directly, efficiently managed Cost Centres can contribute to overall profitability.
Shumaila Saeed
Jan 15, 2024
How do Cost Centres relate to cost accountability?
They assign cost accountability to specific departments or areas within a company.
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Jan 15, 2024
Is the calculation of Cost Units complex?
It can be complex, depending on the diversity of products or services and the production process.
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Jan 15, 2024
What's an example of a service-based Cost Unit?
In services, a Cost Unit might be cost per hour of consultancy.
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Jan 15, 2024
How do Cost Centres aid in cost control?
By tracking expenses in specific areas, Cost Centres help identify and control costs.
Shumaila Saeed
Jan 15, 2024
Does a Cost Unit vary across industries?
Yes, it varies based on industry-specific production and service models.
Shumaila Saeed
Jan 15, 2024
Are Cost Units used in cost-plus pricing?
Yes, they're essential for calculating the cost base in cost-plus pricing models.
Shumaila Saeed
Jan 15, 2024
How do Cost Centres impact financial reporting?
They provide detailed insights into where and how costs are incurred within the company.
Shumaila Saeed
Jan 15, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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