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Fundamentals of Financial and Cost Accounting · Cost, Cost Centre, Cost Unit and Cost Drivers

Cost Centre: Meaning and Types with Examples

Updated 10 October 2026 · Fact-checked

A cost centre is a location, person, item of equipment or function for which costs are collected and measured. Its types are personal, impersonal, production, service, operation and process centres. To solve questions, identify what is being charged with cost, then match it to the right type.

Understand Cost Centre and Its Types

A cost centre is the smallest part of an organisation to which costs are first charged. It can be a place (a factory shop floor), a person (a sales manager), a machine (a lathe) or a function (the stores). The aim is simple: collect cost where it is incurred, so you can control it and later trace it to products.

Think of a college. The library, the canteen and the accounts office each have their own costs. If you track costs only for the whole college, you cannot tell which section is overspending. Cost centres solve this.

Cost centres are grouped in two ways. By what they are, they are personal (a person or group of persons, such as a foreman) or impersonal (a location or equipment, such as a department or a machine). By what they do, they are production centres (they make the product, such as machine shop or assembly) or service centres (they support production, such as stores, canteen, maintenance or power house). Some books also mention operation cost centres (mainly machine or manual operations) and process cost centres (continuous processes like refining).

A cost centre is not the same as a cost unit. A cost centre answers 'where was the cost incurred?'. A cost unit answers 'what are we measuring cost per?' such as per tonne, per kg or per bed-day. A profit centre goes one step further: it earns revenue as well as incurring cost, so its profit is measured. A cost centre only has costs.

Selecting cost centres needs judgement. Factors include the size and layout of the organisation, the nature of operations, the degree of control wanted, the ease of collecting cost data, and the cost of running the system itself. Too few centres hide inefficiency. Too many make the system costly and tedious.

Key formulas to remember

Cost centre classification by nature
Personal centre = person or group of persons; Impersonal centre = location or equipment
Use this when the question asks for personal versus impersonal.
Cost centre classification by function
Production centre = directly makes the product; Service centre = supports production
Stores, canteen, maintenance, power house and HR are service centres.
Cost centre vs cost unit
Cost centre = where cost is incurred; Cost unit = what cost is measured per
Cost centre is a place, person or item. Cost unit is a unit of product or service.
Cost centre vs profit centre
Cost centre: only costs are measured; Profit centre: revenue and costs are both measured
A profit centre can contain several cost centres.

How to solve Cost Centre and Its Types questions

Most MCQs on this topic ask you to identify, classify or distinguish. Use the same short routine each time.

  1. 1Read the item in the question and ask: is it a person, a place, a machine or a function?
  2. 2If it is a person or group of persons, mark it personal. If it is a place, machine or equipment, mark it impersonal.
  3. 3Ask: does it directly make the product? If yes, it is a production centre. If it only supports production, it is a service centre.
  4. 4If the question mentions revenue or profit being measured, think profit centre, not cost centre.
  5. 5If the question mentions 'per tonne', 'per unit' or 'per km', think cost unit.
  6. 6Check the options for the most precise match and eliminate the ones that mix up cost centre, cost unit and profit centre.

Quickest way: Three-word test

When to use it: Use it for one-line identification MCQs when you have under a minute per question.

  1. Where? If the item is a place, person or machine where cost arises, it is a cost centre.
  2. Per what? If the item is a measure such as per kg, per room-night or per passenger-km, it is a cost unit.
  3. Profit? If revenue is also tracked, it is a profit centre.
  4. For production versus service, ask whether the product passes through it. If not, it is a service centre.

Common mistakes in Cost Centre and Its Types

  • Treating a cost centre and a cost unit as the same thing.

    Both are used to collect or express cost, and the names sound similar.

    Fix: Remember: centre is where, unit is per what. A machine shop is a centre. A tonne of steel is a unit.

  • Calling the stores or canteen a production centre.

    Students see that the department is inside the factory and assume it makes the product.

    Fix: If the product does not pass through it, it is a service centre. Stores, canteen, maintenance and power house support production.

  • Thinking a personal cost centre must be an employee only.

    The word 'personal' suggests one individual.

    Fix: A personal centre is a person or a group of persons, such as a sales manager or the supervisors of a shop.

  • Saying a profit centre is just a bigger cost centre.

    Both are parts of an organisation and both track cost.

    Fix: The test is revenue. A profit centre measures revenue and cost, so it shows profit. A cost centre shows cost only.

  • Choosing 'the more cost centres the better'.

    More centres seem to give more control.

    Fix: Cost centres should be chosen to balance control against the cost and effort of the system. Too many make it expensive and hard to run.

Worked examples

Example 1

In a textile mill in Surat, which of the following is a service cost centre? (a) Weaving department (b) Dyeing department (c) Maintenance department (d) Finishing department

Show the solution
  1. Weaving, dyeing and finishing are stages through which cloth passes. They directly make the product.
  2. These three are therefore production cost centres.
  3. The maintenance department repairs machines and does not handle the cloth. It supports production.
  4. So it is the service cost centre.

Answer: (c) Maintenance department

Example 2

Which statement correctly distinguishes a cost centre from a cost unit? (a) Both mean the same (b) A cost centre is where cost is incurred, a cost unit is the unit in which cost is measured (c) A cost unit is always a department (d) A cost centre must earn revenue

Show the solution
  1. Option (a) is wrong because the two terms have different purposes.
  2. Option (c) is wrong because a cost unit is a unit of product or service, such as per tonne, not a department.
  3. Option (d) is wrong because earning revenue describes a profit centre.
  4. Option (b) states the correct difference: centre is where cost arises, unit is what cost is measured per.

Answer: (b) A cost centre is where cost is incurred, a cost unit is the unit in which cost is measured

Exam tips

  • Learn one example for each type: sales manager (personal), a lathe machine (impersonal), assembly shop (production), canteen (service).
  • In 'which is NOT' questions, test each option against the definition one by one. Do not rely on the first that looks right.
  • Watch for revenue in the question. That one word turns a cost centre into a profit centre.
  • Be ready for the selection factors: size and layout, nature of operations, control needed and cost of the system.
  • With no negative marking, always attempt every question. Eliminate two options and guess if unsure.

Practice questions from Cost, Cost Centre, Cost Unit and Cost Drivers

Cost Centre and Its Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost Centre and Its Types: frequently asked questions

What is a cost centre in simple words?

It is a place, person, machine or function for which costs are collected separately. For example, a factory's packing section or a sales manager. It helps management see where cost arises and control it.

What is the difference between a cost centre and a profit centre?

A cost centre only incurs and records costs. A profit centre also earns revenue, so its profit can be measured. A profit centre may contain many cost centres.

What is the difference between a cost centre and a cost unit?

A cost centre is where cost is incurred, such as a department or machine. A cost unit is the unit of product or service for which cost is stated, such as per tonne, per litre or per bed-day.

What are the types of cost centres?

By nature they are personal and impersonal. By function they are production and service centres. Operation and process cost centres are also commonly mentioned.