Definition: The Institute of Cost and Management Accountants (ICMA) has defined cost as “the amount of expenditure, actual or notional, incurred on or attributable to a specified thing or activity”. It is the amount of resources sacrificed to achieve a specific objective. A cost must be with reference to the purpose for which it is used and the conditions under which it is computed. To take decisions, managers wish to know the cost of something.

Cost Unit:

A cost unit is any thing for which a separate measurement of costs if desired. A product, service, department, project or an educational course can all be cost units. Cost units are chosen not for their own sake but to aid decision making. Thus a cost unit is a “quantitative unit or product or service in relation to which costs are ascertained”. The cost unit to be used at any given situation is that which is most relevant to the purpose of cost ascertainment.

Cost Center:

According to ICMA London, cost center is “a location, person or items of equipment in respect of which costs may be ascertained and related to cost units for chooses”. It is simply a method by which costs are gathered together, according to their incidence, usually by means of cost center codes. It is the smallest element of an organization in respect of which costs are charged and ascertained.

Maintenance department, a public relation office, a printing machine are all examples of cost centers.

The establishment of cost centers serves two important purposes. Firstly cost ascertainment is made possible by collecting and charging cost to each cost center. Secondly, cost control is ensured as costs can be more closely looked at and more easily monitored by a responsible official. The setting up of a cost centers depends on numerous factors such as organization of factory, requirement of the costing system and management policy.