A cost center is any function or business unit within a company that costs the company money but does not generate any revenue for the company on its own. The cost centre indirectly contributes to a company’s profitability, unlike a profit center, which contributes to profitability directly through its activities.
What are the benefits of cost centers?
There are several advantages to having a cost center within an organization. They:
Improve monitoring and control in the organization. Cost center activities are visible on a company’s balance sheet. This information enables CEOs and business owners to monitor and control a particular unit or resource.
Provide greater accountability. Cost centers are also known as responsibility centers. Businesses can use cost centers to assign managers responsibility for cash flow, expenses incurred, funds invested, and budget allocations.
Make troubleshooting easier. Cost center managers and bookkeepers retain meticulous records and financial statements, which helps the management accounting departments ensure better control and analysis of the total costs of the business.
Measure performance. Metrics derived from analyzing cost center data help create detailed internal reports that help improve financial accounting and maximize profit and efficiency within the organization.
What are some examples of cost centers?
There are several types of cost centers within an organization. They include:
Impersonal cost centers: These cost centers deal with equipment, production, machinery, or locations. A good example is the research and development department.
Operation cost centers: These cost centers mainly focus on people or machines engaged in operational activities. IT departments are an example of a cost center as they ensure that hardware, software, and networks are all operational, up-to-date, and secure.
Personal cost centers: These cost centers mainly deal with an organization’s specific person or group. An example of a personal cost center is a company’s human resources department which handles recruitment and employee needs.
Product cost centers: These centers focus on a single product or manufacturing area. An example of a product cost center is a production department in a publishing company charged with printing books, newspapers, or magazines.
Process cost centers: Process cost centers deal with a single process or event. An example is a customer service department that maintains good customer relations.
Service cost centers: These centers focus on providing services to the company. A janitorial staff, for example, keeps the workplace clean and orderly so that employees can be healthy, safe, and productive.