Cost Center and Cost Unit Definition and Classifications

In this system a suitable cost-unit is adopted, which is not a job or process but is related to service rendered e.g. ton-kilometer, passenger-kilometer of transport services, unit of electricity or kilowatt hour, cubic meter of gas etc. A hotel is engaged in providing food, accommodation and other comforts to its customers. Costs incurred by a hotel may be fixed or variable. Fixed costs may include salaries of staff, depreciation of fixed assets etc., while variable costs may comprise lighting and power charges, wages of room attendants etc.

This measure of the quantity of a product or service is known as the cost unit. Given the above, a cost center is, therefore, a natural division of an undertaking that helps to measure and understand operational costs and apply costs to products. That’s to say, a cost center refers to any place, person, machine, section, part, activity, or function within an organization or undertaking by which costs are collected or accumulated, and to which costs are allocated. For ascertaining cost figures, a hospital operating cost sheet is prepared. The main problem with service costing is the difficulty in defining a realistic cost unit that represents a suitable measure of the service provided.

This method is applicable to road transport undertakings, railways, tramways, airways, shipping companies, electricity companies, gas companies, hospitals, cinemas, hotels, canteens, water works etc. Operating Costing is also applied in those undertakings engaged in steam production. (iv) In the case of these undertakings, a proper distinction between fixed and variable cost is of utmost importance since the economies and scale of operations considerably affect the cost per unit of service rendered. For example, in case of a transport company if the buses run capacity packed, the fixed cost per passenger shall be lower. Operating costing is used by concern running diverse nature of activities, the cost system is obviously different from that for manufacturing concerns.

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2. In large firms, a boiler house is a service department providing services to production departments.
3. That’s to say, a cost center refers to any place, person, machine, section, part, activity, or function within an organization or undertaking by which costs are collected or accumulated, and to which costs are allocated.
4. It is expected that 90% of the rooms will always remain occupied.
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6. Services rendered to consumers are known as external service; for example, hospitals, transport companies, electricity companies etc.

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The details shown in the log book enable the management to make suitable allocation of vehicles to avoid waste or idle running capacity. The records also provide data for the proper allocation of costs and in this respect, these may be compared with the production details available in a manufacturing concern. Operating costing method is one designed to ascertain and control the costs of the undertakings which do not produce products but which render services. Operating costing is also known as service costing.

(b) Comparing the cost of maintaining in cinema halls composite cost unit is one vehicle with the cost of another vehicle of the same type. To help to fix the hire charges of a vehicle where a vehicle is given on hire. (i) Number of trips (run kilometer) by the vehicle during a day. Costing procedures are similar for all operations. If the Depreciation is computed on the basis of the time factor, it (i.e., Depreciation) falls into the category of Fixed Operating Costs.

Service costing is very useful in determining the cost of providing servi8ces which became a base for ascertaining the price of services. Service costing is extensively used in Transport industries. The costs involved in canteen services include the cost of material, labour, services, consumable stores and miscellaneous overheads.

Production overheads represent indirect materials, indirect wages and indirect expenses attributable to:

These expenses are constant and are incurred irrespective of the extent of service. The main problem in operating costing is the selection of a unit of cost. In case of some of the operating undertakings, the unit of cost is simple and obvious.

Vii) To ascertain whether the cost incurred on maintenance is excessively incurred or not. Iii) To keep the operating cost at the optimum level. (vii) This system requires a more detailed but simpler statistical data for proper costing.

Hotel Costing – Ascertaining Cost per Room or Cost per Man, Illustration and Statement of Cost

(iv) Period and timing of no use of the vehicle and reasons thereof like repair, non-availability of passengers or goods to be carried etc. On the other hand, if Depreciation is calculated on the basis of the utilization of the vehicles, it (i.e., Depreciation) falls into the category of Variable Operating Costs. It is not concerned with accounting for inventories, other than those for miscellaneous supplies. There is nothing like finished services inventory similar to finished goods inventory.

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