1.3 Cost centre, cost object and centres

Cost centre is the term used to describe where in an organisation costs are gathered and then attributed to the units of output. Normally, cost centres consist of departments, but a cost centre can also be a project. A cost object refers to any thing or activity for which a separate measurement of costs is desired. An example of a cost object would be the cost of rendering a service to a hospital patient. Other examples would include the cost of a product, the cost of a process or a department.

Cost objects and cost centres are a fundamental component of a cost accounting system. They serve as the basis for:

• Classifying actual costs incurred.
• Preparing budgets for planned costs.
• Comparing actual costs with budgeted costs (for management control purposes).

In addition to cost centres, there are several other types of centres:

• responsibility centres
• profit centres
• revenue centres.

You can read more about the types of centre in the interactive figure below.