Cost centre

Cost centre means a function, a group of person, location, an activity or an item of equipment for
which costs may be accumulated and used for the purpose of the cost control. Different companies
determine their different cost centre according to their nature such as manufacturing company setting
machine department as cost centre. Cost centre is one type of responsibility centre. Cost centre acts as
a collecting place for costs. The word “costs” normally means production overheads.

The total cost centre related to the cost units which have passed through the cost centre to determine
a cost per unit. Which means we can calculate how much of the production overhead cost per 1 unit
product, add up with direct cost to find out the total product cost of the product. Therefore, the total
product cost can be used to determine the selling price of those goods.

After the cost assign to the production or service cost centre, it will charged or absorb this
production cost to cost unit as part of the product cost. In a company will use cost centre in a
management accounting system to decide a product cost. By using cost centre will make company
avoid loss from uncalculated indirect cost.

Cost unit

Cost unit is a unit of quantity of product or service in relation to which costs are ascertained or
expressed. Means that cost unit can be anything for which it is possible to determine the cost and
useful for cost control purpose. Cost unit is the unit used to measure the different products through the
process of allocation, apportionment and absorption.

Cost unit is important to company as it lets company know about how much the cost incurred on the
different activities compare to profit generated by the activities. While preparing cost accounts, it
becomes necessary to select a unit with which expenditure may be identified, it can capture direct cost
otherwise cannot capture indirect costs. Ordinarily cost unit is the expression in the form of weight,
dimension, count and value.

For example, Industry sector and business , brick-making is based on number of bricks, electricity is
based on kilowatt-hour (KwH), hospital is based on number of patient-day, hotel is based on number
of bed-night, Professional services is based on chargeable hour.
Differences between Financial accounting and management accounting

1. purpose

Management Accounting is the process of identification, measurement, accumulation, analysis,

preparation, interpretation, and communication of information that used by internal management to do
planning, controlling and evaluation and to assure appropriate use of accountability for its resources.
Reports can be created for any time such as daily, weekly or monthly. Reports have predictive value
to the internal members and also used to be future looking.

On the other hand, financial accounting is used to present the financial health of the organization to
the external parties such as creditors, bank, stockholders and tax authorizes and regulators with
relevant financial information so that stockholders can make decisions. Financial reports are generated
for a period of time, such as a financial year or period. Financial reports are historically factual and
have forecasting value to third party so that they can make financial decisions or investments in the
company.

2. Legal requirements

Management accounting reports have no legal requirement since management accounting is only
generated for managerial decision making purpose. Reports are less stringent, no specifications except
those indicated by individual managers and don’t have to follow Generally Accepted Accounting
Principles (GAAP) guidelines.

While financial accounting reports must follow GAAP guidelines to ensure accuracy. A Company
will be in trouble and reprimanded if find out the financial statements have any misrepresentation or
fraud occurs.

3. Precision

Management accounting can make mistakes from a legal perspective, but could result in bad
decisions making. No legal repercussions will occur if any errors are being made. Management
accounting contains current information and can give estimates rather than precise data. These
estimates can be calculated quickly and it is conducive to decision making.

While financial accounting is not available for mistakes, data shared must be accurate. Precision is
vital since financial reports are generated with intention of being released to the external parties. With
accurate financial reports, third party can only make better decisions.