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Cost Accounting

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Cost Centre

According to the Chartered Institute of Management Accountants, England cost centre means “a location, person or item of equipment or group of these for which costs may be ascertained and used for the purpose of cost control”. Thus, cost centre refers to one of the convenient units into which the whole factory organisation has been appropriately divided for costing purposes. Each such unit of a department or a sub-department or an item of equipment or machinery or a group of persons.

Sometimes, closely associated activities are combined together and considered as one unit for costing purposes, but at other times these activities may be segregated. For example, in a laundry, activities such as collecting, sorting, marking and washing of clothes are performed. Each activity may be considered as a separate cost centre and all costs relating to a particular cost centre may be found out separately.

Cost centres may be classified as follows:

(i) Productive, unproductive and mixed cost centres.

(ii) Personal and impersonal cost centres.

(iii) Operation and process cost centres.

Productive cost centres are those which are actually engaged in making the products. Service or unproductive cost centres do not make the products but are essential aids to the product centres. Examples of such service centres are those of administration, repairs and maintenance, stores and drawing office departments. Mixed cost centres are those which are engaged one time on productive and the other time, on service jobs. For example, a tool shop serves as a productive cost centre when it manufactures dies and jigs to be charged to specific jobs or orders but serves as service cost centre when it does repairs for the factory.

Impersonal cost centre is one which consists of a department, plant or item of equipment. While, a personal cost centre is one which consists of a person or group of persons. In case a cost centre consists of those machines and/or persons which carry out the same operation it is termed as operation cost centre. If a cost centre consists of a continuous sequence of operations, it is called process cost centre.

In case of an operation cost centre all machines or operators performing the same operation are brought together under one centre. The objective of such an analysis is to ascertain the cost of each operation irrespective of its location inside the factory. In the process type cost centre the cost is analysed and related to a series of operations in sequence, such as in chemical industries, oil refineries and other process industries.