The organization’s pain point is the Cost Center, which the corporation must address. It does not make a profit, but it does have expenses. They are the polar opposites of profit centres, which, unlike cost centres, actively contribute to the company’s revenue. Once the organisation has identified a cost centre, the management of that centre is in charge of executing all cost management techniques in order to keep costs under control. Cost centres are used to keep track of expenses.
This means that management’s responsibilities are limited to reducing costs and keeping them within the budget set by senior management.
A cost unit is a standardized unit of cost measurement. It allows for cost comparisons to be made more easily. It is unique to a certain product or service. The cost unit in the road-building business, for example, is Km or m. The cubic meter is the cost unit in the gas sector.
Cost Centre Vs. Cost Unit
The distinction between a cost centre and a cost unit is that a cost centre is an organization’s cost-generating department. The cost unit, on the other hand, is the unit of measurement for a certain product or service.
What exactly is a Cost Centre?
The phrase “cost centre” refers to one or more divisions within a company that do not contribute directly to the organization’s revenue generation process, but do incur expenses. This means that, while cost centres indirectly contribute to the organization’s revenues, they are nonetheless classified as cost centres. This is due to the fact that those profits are difficult to quantify or measure.
The Research & Development department (R&D) is an example of such a unit, which is in charge of developing products for businesses. The expense of developing new products is high for this department. However, the R&D department’s revenue generation is unmeasurable because the product generated by that department, when sold, credits the Sales department with income generation.
As a result, cost centres might be said to be critical to organisations.
To ensure that these cost centres do not eat into the company’s earnings, senior management establishes standards for these departments to follow in order to keep their costs from exceeding the budgeted amount. The only responsibility of such departments’ management is to keep costs in check. They don’t have to be concerned about making money.
Standard cost centres and discretionary cost centres are the two categories of cost centres. The standard cost centre is one where the input and output ratios are easily defined. Standard cost centres are the polar opposite of discretionary cost centres. It’s difficult to determine their input-output ratio.
What exactly is a Cost Unit?
A cost unit is a division of the organization’s administration department. These are the standards that help companies with their cost measuring and comparison operations. These are the company’s specialized units, which differ by industry.
A tonne, for example, is the cost unit in the steel sector. Similarly, in the vehicle sector, the cost unit is the number, and in the hotel industry, the cost unit is the room. Cost centres come before this.
Cost units are used to compare data and measure the expenses of different cost centres after the cost centres have been identified.
A company’s cost unit might be either a simple unit or a complex/composite unit. A simple unit is one that uses only one unit of measurement, such as per meter, per tonne, per kilogramme, per piece, and so on.
When more than one unit of measurement is used, it is referred to as a complicated unit. Per kilowatt-hour, per passenger-kilometre, and so on are some examples.
As a result, the primary objective of the cost unit is to assist the company in standardizing expenses across all departments and determining which unit is incurring the majority of the expenditures. Top management can then exercise authority over certain departments.
Difference Between Cost Centre and Cost Unit
- A cost centre is a department within a company that incurs expenses but does not contribute to the company’s profits (directly). The cost unit is used to calculate these costs.
- Cost centres serve as a foundation for categorizing expenses, whereas cost units serve as a means of standardizing costs.
- The cost centre collects and absorbs costs, while the cost unit counts them.
- Cost centres are determined by the manufacturing procedures, whereas cost units are determined by the output.
- Cost centres come before cost units.
Despite the fact that cost centre and cost unit are two independent terms, they are intertwined and necessary for cost control in a company. Where a cost centre relates to a subdivision, location, department, or other entity, a cost unit refers to the measurement medium.
The marketing department, Research & Development department, and other cost centres are examples of cost centres. Meter, kilometre, gallon, and other cost units are examples.
The first phase in the cost analysis process is to identify the cost centres, and the second is to assess the costs of those departments using the cost units determined by top management. Cost centres produce profit through operational efficiency, but they do not directly contribute. The cost unit aids in the quantification of these departments’ costs.