Cost centre is a production or service location, function, activity or item of equipment for which costs can be ascertained e.g. a ward in a hospital, a department.

Published: 2019-05-15 11:05:53
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Cost unit is a unit of product or service in relation to which costs are ascertained e.g. a hotel room.

Costs can be classified by

Element (material, labour, expenses);

Function (production, non-production);

Nature (direct; indirect);

Behaviour (variable, fixed; stepped-fixed; semi-variable).

Materials are all costs of materials purchased for production and non-production activities, e.g., raw materials.

Labour are all staff costs relating to employees on the payroll of the organization.

Expenses are all other costs which are not materials or labour, e.g., rent, telephone, etc.

Production costs are those incurred when raw materials are converted into finished and part-finished goods (work-in-progress). Production costs are divided by direct materials (materials which go into making the product), direct labour (labour directly engaged in making a product), direct expenses (costs of expenses directly involved in making a product), variable production overheads (overheads which vary in direct proportion to the quantity produced), fixed production overheads (overheads fixed whatever the quantity).

Non- Production costs are costs not directly associated with the production of businesses output. Non-Production costs are not used to value inventory.Non-production costs consist of administrative costs (costs of running general administration), selling costs (costs associated with marketing and taking orders), distribution costs (costs of distributing finished products) finance costs (costs incurred in order to finance an organisation).

Direct costs can be directly identified with a specific unit or cost centre. For calculating this kind of cost we use the formula: Total of direct costs = Direct Materials + Direct labour + Direct expenses = Prime Cost

Indirect costs can not be directly identified with a specific unit or cost centre, therefore Indirect costs = Indirect Materials + Indirect labour + Indirect expenses = Overheads

Variable costs are costs that vary in total with the level of activity. Costs that vary with the level of activity, e.g. material costs.

Fixed costs are costs incurred for an accounting period, and which within activity levels remain constant.

Stepped fixed costs are fixed costs which are only fixed within a certain level of activity. Once the upper level is reached, a new higher level of fixed costs becomes relevant.

Semi-variable costs:are costs with a fixed and a variable element, therefore is partly affected by changes in the level of activity. Good example is telephone charges with fixed line rental and charge per call; electricity bills with fixed standing charge plus variable cost per unit of electricity consumed.

ReferencesDirect Costs and Indirect Costs Defined | Examples. (n.d.). Retrieved from, J. (n.d.). Costs by Behavior: Fixed, Variable and Mixed | Managerial Accounting [Web log post]. Retrieved from

Kaplan, R. S., & Cooper, R. (1998). Cost & effect: Using integrated cost systems to drive profitability and performance. Boston: Harvard Business School Press.

Production Cost Definition | Investopedia. (n.d.). Retrieved from


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