Cost centre (business)

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Cost center is the department in the business where costs can be allocated. This term includes departments that do not generate directly but incur costs for businesses, when cost center managers and employees are not responsible for profitability and business investment decisions, but they are responsible for some of the costs.

Video Cost centre (business)

Jenis

There are two main types of cost centers:

• Production cost center, where the product is manufactured or processed. This example is the assembly area.
• Service center fees, where services are provided to other cost centers. This example is the personnel department or the canteen.

Maps Cost centre (business)

Example

• Marketing department
• Human resources
• Research and development
• Workplace
• Quality assurance
• Technique
• Logistics

Cost centers can be trimmed into the smallest separate tasks within the Department. No need to regard the department as a direct cost center. Some companies adopt a different approach when treating cost centers.

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Cost-specific-function

The main function of a cost center is tracking all costs associated with a particular function. For example, considering a call center as an independent unit, a company can calculate how much of an expenditure each year for its 1-800 support service. If the cost center is not considered independent, much effort is required in measuring the cost of providing this service as it will include the division of all personnel and corporate phone bills by the department each month.

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Benefits

There are many benefits of a cost center that includes:

• Monitoring efficiency - Cost centers are useful because they enable the effectiveness of all aspects within a company to be closely monitored.
• Employee confidence - Delegating authority that occurs when keeping employees accountable for a cost center is a way to increase confidence.
• Prevention losses - Cost centers try to update processes, become more effective and save money so as to reduce expenses. Cost centers are trying to cover all their costs by offsetting revenues by reducing costs and generating unexpected income, thus preventing losses.
• Increase profit - If one of the cost centers is excluded from the company, it negatively impacts the company's profit margin. For example, if the HR department is deleted then basic work functions and important business processes can not be performed that will negatively impact corporate earnings.
• Management efficiency - Managers compare cost data over different time periods to see if the cost center becomes more or less profitable. Generally certain people (cost center managers) are responsible for costs incurred at cost centers under their control, in which case, collecting and comparing costs can motivate managers to become more productive.

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Weakness

There are some disadvantages of cost centers that include:

• Negative effects on other departments - although certain departmental operating costs are easy to quantify, cost centers are a source of encouragement for managers to lack of their elements so as to benefit the cost center, which can have harmful effects on other departments within the firm.
• Difficult to monitor efficiency - It's hard to track how efficient the center is.
• Profit can not be controlled - Division performance can only be evaluated in terms of cost because profit does not control the manager.
• Efficiency and productivity can not be properly assessed - at the cost center, the decision result is calculated on a cost basis only; the achievement of a cost center is not measured in terms of finances, therefore it is difficult to judge efficiency and productivity correctly.

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Difference between cost center and profit center

Cost centers add to company costs while profit centers add costs and profits. In addition, the main purpose of cost centers is to minimize costs while the main goal of a profit center is to maximize profit. Profit centers provide wider and more general performance measurements than cost centers. At the cost center, managers are only responsible for costs while in the profit center, managers are responsible for costs and profits. In these situations when managers are responsible for both, profit and cost, each manager's contribution to corporate goals becomes more easily measured.

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References

Source of the article : Wikipedia