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Unit 2: Cost Elements and Classification

2.1 Cost Unit Notes

Cost unit is defined by the ICMA as “a quantitative unit of product or service in relation to which
costs are ascertained”. A cost unit is a device used for the purpose of splitting total cost into smaller
sub-divisions attributable to products or service. A cost unit simply stated is a unit of finished
product, service of these in relation to which cost is ascertained and expressed. The following are
some of the examples of cost units selected from different industries or organisations:

Table 2.1: Cost Units Selected from different Industries

Name of the Industry or Organisation Product Cost Unit
Brick Industry Bricks Per 1,000 bricks
power Industry Electricity Per kilo-watt hour
Cement Industry Cement per tonne
pharmaceutical Industry Tablets per 1,000 tablets
Sugar Industry Sugar per tonne
Furniture Industry Table per table
Hardware Industry Bolts and nuts per 1,000 pieces
Cotton Textile Industry Yarn per Kg
Construction Company House per contract
Transport Companies Service per passenger mile
Hospital Service per bed-day
Canteen Service per meal

Cost Centre

A cost centre refers to a part of a factory for which costs are accumulated separately. In order
to facilitate charging of costs to cost units, it is necessary to divide the factory or industry into
various parts which can be used to accumulate costs for subsequent distribution. Each such part
of a factory or industry is known as cost centre.

Did u know? What is responsibility centre?
Cost centre facilitates fixation of responsibility for every officer-in-charge of part of
department or section. Hence cost centre is also known as responsibility centre.

Cost centre has been defined by ICMA as “a location, person or item of equipment or group of
these in respect of which costs may be ascertained and related to cost units”.
The main kinds of cost centre are given below:

z z Operation and process cost centre,
z z production and service cost centre, and
z z personal and impersonal cost centre

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