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Cost Center

Reviewed by Vineeth | Updated on Oct 05, 2020

Catalogue

Introduction

A cost centre is defined as a function or department within a company which is not directly going to generate revenues and profits to the company but is still incurring expenses to the company for its operations. The contributions made by the cost centres in terms of profits is indirect.

It is very much, unlike a profit centre, whose actions will directly result in the profits to the company. The offices of the cost centres, like human resource executives and accountants, are given the responsibility of keeping the costs well below the budget allocated to them.

Understanding Cost Center

The operations of a cost centre will not directly result in profits to the company. However, their operation, such as customer service and enhancing product value, would help the company get more business. Cost centres will support the management in using the resources smartly by understanding how they are used in the company.

Despite cost centres making contributions indirectly, one cannot ignore the revenues coming through them. Most associated advantages or the activities that produce profits from these wings of the company are generally ignored for the purpose of internal management.

Functions

The primary function of cost centres is to keep track of the expenses incurred. The managers or other high-level officials are given the responsibility of having the costs in sync with the allocated budget and will not be bearing responsibilities as to how the revenues generated to be used.

The segmentation of expenses into cost centres will allow for a great level of control and analysis of the overall costs involved. Accounting resources at all levels will allow for more efficient calculation and accounting.

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