Cost centres refer to specific divisions and departments, that are responsible for managing their own expenses and can have costs assigned to them.
In cost accounting, a cost centre is any department or function within an organisation for which costs are incurred. Cost centres are utilised to separate financial activity according to the nature of the operation.
Purpose of a Cost Centre
A cost centre can also be responsible for revenue generation, but this is not its primary purpose. The main purpose of cost centres is to provide information that can be used for decision-making and cost control.
A cost centre is often used with profit and investment centres. Profit centres are responsible for generating revenue, while investment centres are responsible for incurring costs.
Cost centres can be either fixed or variable. Fixed cost centres have costs that do not change with changes in activity levels. For example, the rent for a factory is a fixed cost. Variable cost centres are those that have costs that do change with changes in activity levels. For example, the cost of electricity for a factory is a variable cost.
The concept of cost centres is important in management accounting and financial accounting. In management accounting, cost centres are used to help managers make decisions about where to allocate resources. In financial accounting, cost centres are used to help prepare financial statements.
Benefits of Cost Centers in Costing
Here are some of the benefits of using cost centres in costing:
Better Resource Allocation: The data in the cost center can be applied to improve resource allocation. By knowing the drivers of costs within every area, companies can make better use of their resources and see to it that funds go where they are needed the most.
Improved cost control: Cost centres help managers to track and control costs more effectively. By understanding where costs are being incurred, managers can identify areas where costs can be reduced.
More accurate financial reporting: Cost centres help to improve the accuracy of financial reporting by providing a clear separation between direct and indirect costs. This information can be used to create more accurate financial statements and budgets.
Better decision-making: Cost centres provide managers with valuable information that can be used to make better decisions about resource allocation and product pricing.
Performance Appraisal: The cost center managers can be appraised on their capacity to manage the costs in their areas. This enhances effectiveness and ensures responsible allocation of resources.
Cost Transparency: Cost centers present clear details regarding the costs of different activities or departments. This information is important in making appropriate decisions regarding pricing, resource deployment, and strategic management.
Conclusion
Overall, cost centers are useful tools for companies looking to enhance cost control, accountability, decision-making, process simplification, and financial management. With effective use of cost centers, organizations can better understand their cost structure and maximize resource allocation for improved efficiency and profitability.
