Cost Centre is the pain point of the organization that the company needs to focus on. It does not generate any profit but still incurs costs. They are opposites of profit centers which unlike cost centers, contribute to the organization’s revenue directly. Once the organization identifies that there is a cost center, the management of that particular center is responsible for implementing all the cost management methods to keep the costs under control. Cost centers act as expense tracker.
This means that the management’s responsibility is restricted to minimizing the costs and keeping them under the line specified by the top management.
Cost Unit is a standardized method of measuring costs. It facilitates a comparison between different costs. It is specific to a product/service. For example, in the road construction industry, the cost unit is Km or m. In the Gas industry, the cost unit is the cubic meter.
Cost Centre vs Cost Unit
The main difference between Cost Centre and Cost Unit is that a cost center is a cost incurring department of the organization. In contrast, the cost unit is the way that cost is measured concerning a particular product or service.
Comparison Table Between Cost Centre and Cost Unit (in Tabular Form)
| Parameter of Comparison | Cost Centre | Cost Unit |
|---|---|---|
| Meaning | It is the term used to refer to the cost incurring subdivision that is not actively contributing to the revenue generation of the organization. | It is the term used to identify the specific product/service that is the cause of the costs. |
| Scope | It has a broader scope. | It has a narrow scope. |
| Cost | Cost units absorb the costs collected. | It is the unit to measure the cost. |
| Purpose | It helps to classify costs. | It acts as a standard medium of comparison. |
| Precedence | It comes first in the process of cost analysis. | It is preceded by the cost center. |
| Number | There can be several cost centers. | There are different cost units for each product/service. |
What is Cost Centre?
Cost Centre is the term used to refer to one or more units in a firm that do not contribute directly to the revenue generation process of the organization, but they incur expenses. This means that cost centers do contribute to the organization’s profits indirectly, but they are still considered cost centers. This is because those profits are hard to measure or quantify.
An example of such a unit is the Research & Development department (R&D) which is responsible for developing products for organizations. This department incurs a lot of cost of coming up with new products. But the revenue generation is not measurable for the R&D department because the product developed by that department when sold gives the Sales department credit for generating revenue.
Thus, it can be said that the cost centers are essential to organizations.
So, to make sure that these cost centers do not take over the profits of the company, the top management lays down the guidelines for such departments to prevent their costs from crossing the amount specified. The management of such departments is only responsible for maintaining the costs in such units. They do not have to worry about generating profits.
There are two types of cost centers – standard cost centers and discretionary cost centers.
The standard cost center is one where it is easy to define the input and output ratio. Discretionary cost centers are opposite to the standard cost centers. Their input-output ratio is tough to identify.
What is Cost Unit?
A cost unit is a unit in the administration department of the organization. These are the standards that assist cost measurement processes in companies and facilitates comparison. These are specialized units of the company and vary from industry to industry.
For example, the steel industry’s cost unit would be a ton. Similarly, the cost unit of the automobile industry is the number and cost unit of the hotel industry is room. This is preceded by cost centres.
After the identification process of the cost centres, cost units facilitate the comparison of data and measure the costs of different cost centres.
The cost unit of a company can be a simple unit or a complex/composite unit. A simple unit is one that only using one single standard of measurement such as per meter, per tonne, per kg, per piece, etc.
The complex unit is one where more than one unit of measurement comes into play. Some examples of the same are per kilowatt-hour, per passenger-kilometer, etc.
Thus, the primary purpose of the cost unit is to help the organization standardize the costs over all the departments of the organizations and figure out which unit is incurring most of the costs. This enables the top management to exercise control over those departments.
Main Differences Between Cost Centre and Cost Unit
- A cost center is a department within the organization that incurs cost but does not contribute to the profits of the organization (directly). These costs are measured by the cost unit.
- Cost centers are a basis for categorizing costs, whereas cost unit is a medium to standardize costs.
- Cost centers collect and absorb the costs whereas the cost unit measures the costs.
- Cost centers are defined based on the production techniques, whereas cost units are decided upon by considering the output.
- Cost units are preceded by cost centers.
Conclusion
Even though the cost center and cost unit are two different terms, they are interdependent and essential for an organization to control costs. Where cost center refers to a subdivision, location, department, etc. cost unit refers to the medium in which the costs are being measured.
Some examples of cost centers are the marketing department, Research, and Development department, etc. Some examples of cost units are meter, kilometer, gallon, etc.
In the cost analyzing process, identifying the cost centers is the first step, and the second step is to measure the costs of those departments using the cost units decided by the top management. Cost centers do generate profit through their operational efficiency but do not contribute directly. Cost unit helps to measure the costs of these departments in quantifiable terms.
References
- https://dl.acm.org/doi/abs/10.1145/2813885.2737985
- https://specialties.bayt.com/en/specialties/q/300863/what-is-an-example-of-cost-unit/