Cost Centres - Meaning, Importance | Management Study Online

Cost Centres - Meaning, Importance | Management Study Online

5-6 minutes 

Meaning of Cost Centre: What is a Cost Centre?

A cost centre is a department in the organization that does not directly profit money for the organization but it requires money to be funded to work, unlike a profit centre that produces profits for the organization.

Topics Covered:

• Meaning of Cost Centre: What is a Cost Centre?
• Types of Cost Centres
• Benefits of Cost Centres
• Cost Centre Examples
• How are Costs Allocated to a Cost Centre?
• What Is the Purpose of Establishing Cost Centres in an Organization?
• How Are Cost Centres Used in Budgeting and Financial Planning?
• How do Cost Centres Work?

So, you might ask; then why do organizations even have these cost centres in the first place?

These cost-centres are designed for financial planning—that is, keeping a track of the actual expenses when required. It should be one that should also be kept in check and within budget. So, we can say that, directly, the profits go to the organizations. Those who operate these cost centres are the human resources, administrative departments, as well as maintenance teams.

There are many types of cost centers one may find in different companies since every company can choose what and how many types of cost centers they need to have, depending on their requirements.

Sometimes, they may just be content with only some of them as the major aim of these cost centers is to get enough financial and related information and then isolate it for better data collection and reporting.

Here are a few of the cost centres that may be present in an organization:

• Operational cost centre
• Personal or people cost centre
• Impersonal or machinery cost centre
• Locational cost centre
• Product cost centre
• Project cost centre
• Service cost centre

Benefits of Cost Centres

There are many benefits for an organization in having a cost centre:

• Where there are cost centers in an organization, there are people and leaders who are determined to watch over the finances of each department. This eventually helps the company prevent any losses, even if these cost centers do not make direct money for the company.
• Cost centres give a way to a better customer experience of your company since here, the major goal is not to make a direct profit, but to encourage steps that lead an organization towards more success, and eventually to make more profit. The detail and insight of the finances of all the departments will also help you make the right decisions, with the right amount of information.
• These cost centers can help you discover in which department needs more cash and resources and support them if they are having a hard time.

Some Examples of Cost Centre

So far, we have understood that cost centers do not generate money for the company as, in turn, the company invests in them. However, these centers contribute indirectly to the growth of the company and helps it earn more revenue.

Examples of the cost centre include the company''s legal and accounting team, research and development, advertising and marketing, and customer services. All these do not make direct money for the company; instead, they make sure the show goes on and that the product and brand of the company remain in the limelight so that it continues making more profit.

The cost centre for each department only depends on what resources allocation it requires.

What Is the Purpose of Establishing Cost Centres in an Organization?

The ultimate purpose of having cost centres for any organization is that it keeps track of all the outlays so that they can compare those while making the budget of the companies.

Although a cost centre does not directly contribute to the profits of the company, it helps it remain profitable through various means. It''s able to do that by helping the company achieve operational excellence, provide better customer experience, improve the overall quality of the product, and enhance the brand reputation.

The cost centers are also important in helping you to budget and plan your finances, since they present you with a structured framework on what amount of resource is best allocated where so that appropriate appropriations can be watched over and realistic budgets made to be in a good position to support correctly the function of the target department.

This is a great way of beefing financial control in your company, using information the right way to make better decisions, and confirm that the resources are equitably spread to the departments that need it.

How do Cost Centres Work?

Organizations define a number of departments and groups within their body structure, which their heads'' management supervises and keeps regulated. These heads keep a record of expenses incurred in a number of areas for one department.

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