For the purpose of costing, it is desirable to divide the organization into sub-units. Cost center is the smallest organizational sub- units for which separate cost collection is attempted. It can be a location, person or item of equipment. A cost center is primarily of two types: (a) personal cost center (b) impersonal cost center, which consists of a location or item of equipment. Whether it is personal or impersonal, cost center represents organizational span for which separate cost determination is attempted for decision-needs of management. From functional point of view, cost center may be of two types:
(a) production cost centers i.e.; cost centers where production is done, for example, milling, turning and assembling and (b) service cost center i.e.; cost center which render services to production centers, i.e.; boiler plant, repair shop, and crane etc. Formation of appropriate cost center is very important for cost control purposes. Important considerations for formation of cost center are : (i) organization of the factory, (ii) Condition prevalent for incurrence cost, (iii) Management‘s decision-needs
Different Types of Cost
Cost varies with purpose and the same cost data cannot serve all purposes equally well. The word cost is used in such a wide variety of ways that it is advisable to use it with an adjective or phrase, which will convey the meaning, intended. Certain types of cost are briefly discussed below: –
CIMA defines it is as the past cost not taken into account in decision making.
Replacement cost is the cost of replacement in the current market.
Committed cost is a fixed cost, which results from decisions of pior period. The amount of committed cost is fixed by decisions, which are made in the past, and is not subject to managerial
control in the present on short run basis. Examples of committed cost are depreciation, insurance, rent etc.
Historical cost are post mortem costs, which are collected after they have been incurred. These costs, report past events and the time lag between event and its reporting makes the information out of date and irrelevant for decision-making.