CMA Foundation · Fundamentals of Financial and Cost Accounting
Cost, Cost Centre, Cost Unit and Cost Drivers Explained
Cost is the amount of resources given up to get a product or service. A cost centre is a location, person or item where costs are collected. A cost unit is the measure to which cost is attached. A cost driver is the factor that causes cost to change. Learn the definitions, then match each term to examples.
What this chapter covers
This chapter gives you the basic vocabulary of cost accounting. It explains what cost, costing and cost accounting mean. Then it covers the building blocks used to collect and report cost: cost centres, cost units, cost drivers, cost objects, profit centres and investment centres.
The ideas are simple, but exam questions test whether you can tell similar terms apart. For example, a cost centre collects cost, while a cost unit measures cost. A profit centre earns revenue as well as incurring cost. An investment centre is also judged on the capital it uses.
This chapter links to almost every later cost topic in Paper 2. Cost classification, material, labour, overheads and cost sheets all use these terms. If the vocabulary is clear here, the later chapters become much easier to follow.
This chapter is mostly definition and identification, so it is one of the easier places to score in Paper 2. Every question is an MCQ, and many ask you to pick the right term or match an example to a concept. There are no long calculations, so a few hours of focused study can make these answers reliable. The terms also appear inside questions in later chapters, so the effort pays off twice.
Cost, Cost Centre, Cost Unit and Cost Drivers: topics in the order to study them
- 1Concept of Cost, Costing and Cost AccountingStart here because every other term in the chapter builds on what cost and costing mean.
- 2Cost Centre and Its TypesNext, learn where cost is collected, since cost units and cost objects are defined against it.
- 3Cost Unit and Units of MeasurementOnce you know where cost is collected, learn what it is measured per, with industry examples.
- 4Cost Drivers and Activity Based ConceptsThis explains why costs change, and it needs the earlier terms to make sense.
- 5Cost Object, Profit Centre and Investment CentreFinish with the wider terms, which compare and extend the centres you have already studied.
How to prepare Cost, Cost Centre, Cost Unit and Cost Drivers
Treat this as a vocabulary chapter. Your aim is to recognise each term quickly from a short example, because that is how MCQs are framed.
- Read the five topics in the study order and write a one-line definition of each term in your own words.
- Make a comparison list: cost centre vs cost unit, cost centre vs profit centre, profit centre vs investment centre. Note the one difference that decides each pair.
- Build an example bank. For each term, note two or three Indian business examples, such as a hospital, a school, a cement plant or a textile mill.
- Learn the common cost units by industry, and check each against what the business actually sells or does.
- For cost drivers, practise naming the driver for a given cost, such as machine hours for machine running cost.
- Solve MCQs topic by topic. For each wrong answer, write down which word in the question you missed.
- Do a final timed set of mixed MCQs. Eliminate options that confuse a collecting point with a measuring unit.
Common mistakes in Cost, Cost Centre, Cost Unit and Cost Drivers
Mixing up cost centre and cost unit
Fix: Remember that a cost centre is where cost is collected, and a cost unit is what cost is measured per.
Choosing a cost unit that does not suit the industry
Fix: Ask what the business produces or serves, then pick the natural unit, such as per kilometre for transport.
Confusing a profit centre with an investment centre
Fix: Look for capital. If performance is judged against capital invested, it is an investment centre.
Treating cost drivers as the cost itself
Fix: A cost driver is the cause, such as machine hours or number of orders, not the rupee amount.
Mixing costing and cost accounting
Fix: Link costing to finding cost, and cost accounting to the full process of recording, classifying and reporting it.
Overlooking the exact words in an MCQ stem
Fix: Underline keywords like collected, measured, revenue or capital before looking at the options.
Last-day revision: Cost, Cost Centre, Cost Unit and Cost Drivers
- Cost is the amount of resources sacrificed to get a product or service.
- Costing is the technique of finding cost. Cost accounting is the process of recording and reporting it.
- A cost centre is a place, person or item for which costs are collected.
- A cost unit is the unit of product or service to which cost is related.
- Cost centres can be personal (a person) or impersonal (a place or item).
- Cost centres can also be production, service, or other types based on function.
- Choose a cost unit that fits the business, such as per tonne, per kilometre or per bed.
- A cost driver is the factor that causes a cost to change.
- Activity based ideas assign cost using the activities that cause it.
- A cost object is anything for which cost is measured, such as a product, job or department.
- A profit centre is responsible for revenue and cost, so it is judged on profit.
- An investment centre is judged on profit in relation to the capital invested.
Cost, Cost Centre, Cost Unit and Cost Drivers practice questions
- A cost accountant at a hospital in Pune wants a unit that reflects the service actually delivered to patients in the wards. Which of the fol…
- Which of the following is a feature of cost accounting rather than of financial accounting?
- Which of the following statements about a cost object is correct?
- Sundaram Textiles runs a Weaving Division. Its manager controls selling prices, production and costs, but cannot decide on capital expenditu…
- Which of the following best describes 'costing' as distinct from 'cost accounting' in the terminology of cost accountancy?
- Which of the following is the most appropriate cost driver for the cost pool of 'material handling' in a factory?
- A firm is costing each of its customers separately to find which customers are profitable. Here the customer is best described as a:
- A Chennai transport company uses the composite unit 'tonne-kilometre' for its goods fleet. A truck carries 8 tonnes over 150 km and returns …
Cost, Cost Centre, Cost Unit and Cost Drivers in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Cost, Cost Centre, Cost Unit and Cost Drivers: frequently asked questions
Is this chapter difficult for CMA Foundation Paper 2?
No. It is mostly definitions and identification, with little calculation. The challenge is telling similar terms apart, which regular MCQ practice fixes.
What is the difference between a cost centre and a cost unit?
A cost centre is a location, person or item where costs are collected. A cost unit is the unit of product or service used to express cost, such as per tonne or per bed.
What is a cost driver with an example?
A cost driver is a factor that causes a cost to change. For example, machine hours can drive machine running cost, and number of purchase orders can drive ordering cost.
How should I revise this chapter before the exam?
Revise your comparison list and example bank, then attempt a timed set of MCQs. Focus on pairs of terms you tend to confuse.