Each organisation has to identify its cost unit. For example, a company making large items such as computers will probably identify each computer as a cost unit. A company manufacturing small items such as printer paper is unlikely to identify one sheet of paper as a cost unit, but will instead work in larger units such as reams or boxes of paper.
Service industries are likely to use something based on people such as the number of calls taken by a service desk or the number of journeys taken or miles travelled by public transport passengers.
What cost units are used in your organisation and/or department?
There will be more about this in your chosen textbook.
In organisations where the business aims to make a profit, the parts of the organisation which are expected to attract more income than their expenditure are often referred to as Profit Centres. Those parts of the business which normally have no income – such as HR, Finance, Marketing – are referred to as Cost Centres. It is the costs associated with these Cost Centres which have to be covered as overheads or indirect costs by the income from the Profit Centres.
As we discussed at the beginning of this module, Management Accounts vary according to the needs of each business. The Cost Centres identified by your organisation will therefore be individual to that business.
Example Cost Centre Structure
The attached examples of the coding structure of the University of South Britain are slightly simplified versions of a typical University structure. It shows the overall structure for the university and then the detailed breakdown for one School within one Faculty.
[Coding Structure USB.xls]
Every financial transaction within the University requires three pieces of salient information, the account code, the cost centre and the project.
An account code is a four digit, numeric code which determines whether a transaction is income or expenditure. Within the areas of income and expenditure, there is further clarification into the particular type of income and expenditure.
[Account Codes USB.xls]
Under the umbrella of the University, there are a number of companies (legal entities), the main one of which is USB (The University of South Britain). Within USB, the structure is broken down into Faculties and Directorates. Within this breakdown, is the Faculty of Arts & Humanities, which is further broken down into Schools. One School is the School of Lifelong Learning, which is then broken down into cost centres. The only cost centre in the School of Lifelong Learning is DBCP. Within cost centre DBCP, there are a number of projects.
A project can only be set up on one cost centre, so the cost centre is usually determined by the project.
Each project number is an eight digit alpha/numeric code, used to ring fence a particular activity within a cost centre.
For example, if you wanted to be able to identify income & expenditure for day courses versus evening courses, day courses could be set up as project 1, with evening courses as project 2.
Find out if your service is designated as a Cost Centre, part of a larger Cost Centre or even a Profit Centre. Are some of your activities treated differently to others?