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  Terms Used In Cost Accounting

Certain Significant Terms Used In Cost Accounting

It is essential to understand certain significant terms used in cost accounting.

A. Cost Center

Cost Center is described as, 'a production or function, service, activity or item of equipment which costs might be attributed to cost units. A cost center is the most small organizational sub unit for which separate cost allocation is attempted'. In simple words, a cost center is nothing but person or item of equipment, a location to which cost might be ascertained and employed for the reason of cost control. For instance, a production department, sales department, stores department can be cost centers. Likewise, an item of equipment such as fork-lift, a lathe, and truck or delivery vehicle could be cost center, a person such as sales manager can be a cost center. The major object of identifying a cost center is to make easy collection of costs so that additional accounting will be simple. A cost center can be either impersonal or personal, likewise it can be a production cost center or service cost center. A cost center where a particular process or a continuous sequence of operations is carried out is termed as Process Cost Center.

B. Profit Center

Profit Center is described as, 'a segment of the business entity through which both revenues are received and expenses are acquired or controlled'. (CEMA) A profit center is any sub unit of an organization for which both revenues and costs are assigned. As described above, cost center is an activity for which only costs are allocated but a profit center is one in which costs and revenues are allocated so that profit can be ascertained. Such type of revenues and expenditure are being employed to evaluate segmental performance and managerial performance. A division of an organization might be termed as profit center. The performance of profit center is estimated in terms of the fact whether the center has achieved its budgeted profits. So the profit center concept is used for evaluation of performance.

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