Cost Centre Example, Types and Important of Cost Centre
The manager of a cost center is not responsible for revenue generation or asset usage. The performance of a cost center is usually evaluated through the comparison of budgeted to actual costs. The costs incurred by a cost center may be aggregated into a cost pool and allocated to other business units, if the cost center performs services for the other business units. Examples of cost centers are the accounting, human resources, IT, maintenance, and research & development departments. Managers of subsidiary companies will often be treated as investment centre managers, accountable for profits and capital employed. Within each subsidiary, the major divisions might be treated as profit centres, with each divisional manager having the authority to decide the prices and output volumes for the products or services of the division.
Here in the case of Uber Inc. the human resources department, project managers and customer service department are cost centres as these do not generate revenue directly. A cost center is a department or function that costs your business money to run but doesn’t generate any direct revenue. Without cost centres, the individual costs, e.g. for personnel or rent, would simply “float around” without a fixed allocation.
However, this division is still not appropriate because the departments are big. Therefore, we can make a comparison of the cost that is accumulated cost centre-wise, with the standards, estimates and budgets. The purpose of a cost center is to track expenses so that managers can identify areas where costs can be reduced. Cost centers are often categorized by type of expense, such as marketing, research and development, or human resources.
Managers in cost centres are only held responsible for costs under their control. Performance reports for cost centres typically focus on differences between budgeted and actual costs using variance analysis. Other performance measures used include comparison to benchmark cost per unit / service, industry benchmarks (for example R&D costs as a percentage of sales) and efficiency measures such as days to order fulfillment.
Cost Center and Cost Unit
Project managers may oversee projects that produce revenue, but their work doesn’t directly generate it. When employees have tech-related issues, most businesses will have an IT department where wave news and articles they can report equipment or software problems. This is a really important function for businesses because it keeps employees on track and properly equipped to meet their expected workload.
For example, the question of which part of the business needs the most IT support can be answered by evaluating the cost centre by type of cost. To answer this question, IT must charge its expenses to the respective cost centres. In this way, it can be seen, for example, that a particular department is incurring extremely high IT costs, and the company can react accordingly.
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Finally, the person responsible for the cost centre must be able to control the costs themselves. Furthermore, it should always be a spatial unit so that there is no overlapping of responsibilities. In addition, a measure of cost causation that is as accurate as possible must be found for each cost centre, because otherwise there is a risk that the cost control and calculation is/will be faulty.
- For example Canteen, Maintenance shop, Toolroom, Accounts, Power House, etc.
- All managers should receive regular, periodic performance reports for their own areas of responsibility.
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A cost centre can be a location, person, an item of equipment for which we determine cost. For effective control of costs, we divide the factory into various departments. Further, on the basis of the activities performed, these departments are sub-divided into cost centres. In a cost centre, it is pertinent to classify cost into fixed cost and variable cost. Cost centers come in handy here because adding their expenses together makes it easy to calculate total costs for your business. And, if you can separate cost centers from other types of costs at your company, you can clearly explain why your organization is spending money on services or personnel that may not be generating direct revenue.
Using cost centre codes and department accounting
For example, a cost centre could be a sales area such as North East or South West, and different departments could be sections such as Administration or Training. A division of a company which produces and markets the products may be called as ‘profit centre’. The performance of a profit centre is evaluated in terms of the fact whether the centre has achieved its budgeted profits. Think of a situation when the whole factory is treated as a single unit for both budgeting and cost control purposes.
Other performance measures used include growth in revenues and customer satisfaction. Examples of managers of revenue centres include the sales manager of a retail store, the sales department of a production facility, and the reservation department of an airline. Cost centers are typical business units that incur costs but only indirectly contribute to revenue generation. For example, consider a company’s legal department, accounting department, research and development, advertising, marketing, and customer service a cost center. The managers in charge of these departments can control and contain costs – and they are evaluated on their ability to control and contain costs. But there is not much they can do to directly impact the company’s revenues.
What is a real cost example?
For example, real costs would include, but not be limited to, production, market analysis, distribution, and advertising.