Cost is defined as the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing.
What is Cost Centre?
A cost centre is the smallest segment for which cost may be ascertained and used for the purpose of cost control. The cost centre may be a location or a person or group of persons or equipment or group of equipment or operation or a process.
Types of Cost Centres
On the basis of the nature of business activities, the followings are the types of cost centres.
1. Personal Cost Centres: If a cost centre refers to a person or group of persons, it is a personal cost centre.
2. Impersonal Cost Centre: If a cost centre refers to a location or equipment or group of equipment, it is an impersonal cost centre.
3. Production Cost Centre: In a manufacturing concern, a cost centre refers to machine shop, welding shop, grinding shop, polishing shop, painting shop, assembly shop and the like. Such cost centre is a production cost centre.
4. Service Cost Centre: In a manufacturing concern, some centres like stores, power, transport, accounts, personnel department etc., are rendering services to the production cost centre. Such centre is a service cost centre.
The service cost centre is divided into three categories. They are
- material service centre (stores, internal transport etc.,)
- personal service centre (labour office, canteen etc.,) and
- plant maintenance centre (tool room, carpentry, smithy etc.)
5. Operation Cost Centre: A centre is consisting of machines and/or persons carrying out similar operations.
6. Process Cost Centre: A centre is consisting of those engaged on a specific process of manufacture of a product.
Why are cost centre required?
There are two reasons for specifying the cost centre.
The first reason is to fix the responsibility. If responsibility is fixed, the cost control is very easy. Hence, cost centres are also called “Responsibility Centre”.
The second reason is facilitating the recovery of overhead. Overhead is recovered on the predetermined rate. Rate is predetermined on the basis of the nature of completion of work or the process followed.