The 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.
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 comparison between different expenses. It is specific to a product/service.
- Cost centres are organizational sub-units responsible for incurring expenses; cost units are measurements for allocating costs to goods or services.
- Cost centres aid in tracking, controlling, and reducing expenses; cost units help determine product pricing and cost control.
- Cost centres can be departments, teams, or machines; cost units are expressed as units of production or service, such as labor or machine hours.
Cost Centre vs Cost Unit
The difference between Cost Centre and Cost Unit is that a cost centre is a cost-incurring department of the organization. In contrast, the cost unit is how the cost is measured concerning a particular product or service.
|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 organisation’s revenue generation.||It is the term used to identify the specific product/service that is the cause of the costs.|
|Scope||It has a broader range.||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.||The cost centre precedes it.|
|Number||There can be several cost centres.||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 incur expenses. This means that cost centres indirectly contribute to the organization’s profits but are still considered cost centres.
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.
Thus, it can be said that cost centres are essential to organizations.
So, to make sure that these cost centres do not take over the company’s profits, the top management lays down the guidelines for such departments to prevent their costs from crossing the specified amount. The management of such departments is only responsible for maintaining the prices of such units.
There are two types of cost centres – standard cost centres and discretionary cost centres.
The standard cost center is one where it is easy to define the input and output ratio. Discretionary cost centers are opposite to traditional cost centers.
What is Cost Unit?
A cost unit is a unit in the administration department of the organization. These standards assist companies’ cost measurement processes and facilitate comparison.
For example, the steel industry’s cost unit would be a ton. Similarly, the cost unit of the automobile industry is the number, and the cost unit of the hotel industry is the room.
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 team only uses one measurement standard, 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-kilometre, etc.
Thus, the primary purpose of the cost unit is to help the organization standardize the costs over all the organisation’s departments and determine which team is incurring most of the expenses. This enables the top management to exercise control over those departments.
Main Differences Between Cost Centre and Cost Unit
- A cost centre is a department within the organization that incurs costs but does not contribute to the organisation’s profits (directly). The cost unit measures these costs.
- Cost centres are a basis for categorizing costs, whereas cost unit is a medium to standardize prices.
- Cost centres collect and absorb the costs, whereas the cost unit measures the costs.
- Cost centres are defined based on production techniques, whereas cost units are decided upon by considering the output.
- Cost centres precede cost units.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.