Cost Units and Composite Cost Units

The term “Cost Unit” can be defined as a unit of product or service in relation to which costs are ascertained. As an example cost unit for a mobile telecommunication provider would be call minutes. Cost unit can be tangible and intangible in nature. Examples of tangible cost units are garments produced at apparel manufacturing firms, loaves of bread produced at bakeries,  bars of soap produced by soap manufactures. However, to handle the large bulk of cost units and to make the cost control process easy companies can use large cost units such as 1000 units of garments, a case of bread, box of bar soaps consisting of 100 bar soaps. Intangible cost units does not have physical existence and examples of intangible cost units are number of complaints handled by a customer service department,  number of accounting entries handled by an accounting department and number of  client problems handled by business consultants.

When it comes to the service industry, it is difficult to identify the cost unit due t its intangibility, perish-ability and inseparability from the service provider. Thus, a new solution is required to identify the cost unit of services. Thus, a new cost unit is introduced, namely composite cost unit which comprises of two cost units. As an example, the composite cost unit student per academic program/semester in an academic institution represents two components in the cost unit (number of students and number of semesters/academic programs). This would gather the cost of serving a student based on the semesters they have enrolled with the academic institution.

[Credits: This tutorial is done upon the request of our reader Stephanie]

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