A cost centre is a production or service item, activity, function or location of an equipment for which costs are accumulated.
A cost centre is a method of using cost centre codes to gather costs together according to how they occur.
Examples of a cost centre are sales representatives, machines, supervision and so on.
Costs are assigned to cost centres by the use of the method known as cost allocation.
What is cost allocation?
This is the method used to assign a whole item of cost (or revenue) to a single cost centre (or unit), account or time period.
Cost allocation can be applied to direct and indirect costs, but it is not always possible to identify a specific item of cost with a cost centre.
This situation always makes it necessary to split a cost over several cost centres on a predetermined basis. This basis is known as cost apportionment.
What is cost apportionment?
A cost apportionment, also known as indirect allocation is the spreading of costs over two or more cost units, cost centres, accounts or time period.
For the chosen basis to be acceptable, it must guarantee a fair distribution of common cost to each receiving cost centre.
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