written by | May 9, 2022

Cost Centre: Definition, Types, Purpose & Examples

Cost centres are roles of departments referred to as service units or business centres within a company that cost money but don't generate any revenue. They are service, support and administrative services. It's impossible to eliminate these company functions to save money since they are essential to ensuring that operations run as efficiently.

Cost centres are classified separately to make their use of resources easy to track. Managers of cost centres are accountable for ensuring that their cost centres function effectively and in line with the budget. Cost centres can include roles, like human resources or cleaning service, but they can be whole departments, marketing divisions, warranties and even the IT department.

Now, let's understand cost centre meaning, process, types and more!

Did you know?

The amount and size of cost centres a company could have will be contingent on the industry and size of the business. The person who manages the cost centre ensures that the costs align with the budget. They do not have any responsibility for the investment or revenue decisions.

Also Read: All About Tally.ERP 9's Cost Centre

What is Cost Centre Meaning?

Small businesses might have a cost centre to manage office administration or bookkeeping in which there is one person in charge of all aspects. However, there could be distinct cost centres for a larger multinational company for human resource departments, the administrative staff and the finance department. The salaries of every employee of these departments are part of the budget for cost centres, depending on the cost centre in which they are employed.

Function Specific Cost

The primary role of a call centre is to track the expenses of a particular purpose. If you treat a call centre as an independent unit, it can determine the amount they are spending each year on its support line.

Without establishing a cost centre, it would require enormous effort to calculate the costs of providing this service, and it would require breaking down the total number of employees and phone bills per month. Cost centres automate this process, allowing managers to track the budget and costs and monitor them for each particular function that the company is performing.

What is the Process of Cost Centre Work? Examples of Cost Centre

Cost centres are the various subunits of an organisation that don't serve the purpose of earning profits or revenues directly from them but rather they keep track of the costs of the business. The primary objective of the company's management team is to ensure that the expenses of the business are at a minimum by using the cost centre. They also ensure the best usage of its resources, as they help understand how the resources are used within the organisation. 

Resource Allocation

After knowing the cost centre, let's move towards the rescue allocation knowledge area. Measuring the costs by function allows management to allocate limited resources better. Consider, for instance, that the experience suggests that each new product launch will result in a 15% rise in the number of calls to the help desk because customers will be learning to use the new product.

If a company is aware of the exact costs of running a service line, it can calculate the cost of this growth and then compare it to the expected profits from the launch of the new product. Similar to other cost centres, such as that of the warranty department, you can allocate resources to the most profitable activities in the business.

Cost Centre Examples

Every big business includes an accountant and tax team, which has employees who are merely responsible for recording business activities. They discover ways to improve efficiency and reduce taxes.

The department is crucial to ensuring tax compliance. It's not possible to close this department. The tax and accounting departments are cost centres, and it does not necessarily mean they're not valuable to the company.

In case the tax department can help the company save money by reducing its tax-deductible income, it'll, in turn, boost the company's overall financial performance. The same applies to departments in the law, and every major company has an internal legal department responsible for everything from small lawsuits to corporate legal matters. They are in many ways vital and cannot be shut down. They could help companies save many thousands, or perhaps millions, in the case of a lawsuit.

However, they do not directly contribute to the production or sales levels of the company. In many instances, these departments reduce a company's production capacity. They clog up funds that can be used on the production floor. There are a variety of other cost centres in various businesses. For example, a company's advertising and purchasing departments are cost centres.

Financial vs Managerial Accounting

It is important to note that keeping track of cost centres is the job of the management accounting department in comparison to the department of financial accounting. Managerial accountants record and store information that aids management in making crucial decisions.

Financial accountants collect the necessary information to submit before the authority for tax reporting and other organisations like the Securities and Exchange Commission.

The government bodies are mostly concerned with the efficiency and tax liability that comes with it for the company. How many phone bills belong to the marketing department versus the call centre isn't the issue of a financial accountant. However, it matters to a managerial accountant.

Also Read: A Guide on How to Maintain Accounts With or Without Inventory in Tally ERP 9

Types of Cost Centres

Considering the nature of business operations, the following are the kinds of cost centres.

  • Impersonal cost centre: It's an impersonal cost centre if it is related to any location, piece of equipment or a whole group of equipment.
  • Personal cost centre: This cost centre is a personal one (as the name says) if it refers to an individual or group. Examples of this are works managers, sales managers, etc.
  • Service cost centre: The service cost centre provides any service-related function for its production centres or any other cost centres for service. An example of this is a personnel service centre providing catering facilities to business employees.
  • Operating cost centre: Operating cost centre comprises persons or machines that perform similar types of operations in the business.
  • Production cost centre: the production cost centre is responsible for any aspect of production for the business. Examples include machine shops.
  • Process cost centre: The cost centre can be considered the production cost centre when involved in a specific procedure or ongoing sequence of the company's business.

                              

The Most Important Fields in the Cost Centre

We can identify the user accountable for directing the cost centre.

Person Responsible

The person responsible for the budget must be entered in this field, and there isn't any input help. For this section, you will enter the person who is accountable for the actual cost and budget of the cost centre.

User Responsibility

We can input the user accountable for managing the cost centre. Pressing (F4) allows you to search for users on the system, which is not a requirement.

Department

The company can assign this cost centre to a department. It is not a compulsory field, and it does not require input assistance.

Hierarchy Space

We must assign each cost centre to a hierarchical area. You can choose to enter the top-notch or a sub-notch of the cost centre hierarchy. The system automatically assigns this area if we move the cost centre to a different notch of the hierarchy.

Business Area

This is an organisational element within the financial accounting module. We recommend not making use of the business area. Instead, we recommend using profit centres and segments.

If you wish to use the business area, you must add the FIN_GSBER to your accounts ledger.

Cost Centre Category

The cost centre is a compulsory field that defaults certain aspects of the cost centre. We can use it to plan activities.

Company Code

We have to assign all cost centres to a specific company code.

Currency

The currency is in default by the area currency that controls it. The system generally has a cost centre that is the company's code currency. You can change the currency only at the start of each fiscal year.

Functional Area

A functional area is an organisational element that displays a profit and loss statement in sales and accounting costs.

Conclusion

Organisations use cost centres to track all costs associated with the specific function. Their primary goal is to reduce the costs. They do not earn revenue for the business; however, they are responsible for incurred expenses for the company.

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FAQs

Q: What are various types of cost centres?

Ans:

Professional centres can be of the following types:

  • Personal cost
  • Impersonal cost
  • Production cost
  • Service cost
  • Operation cost
  • Process cost

Q: What are some cost centre examples?

Ans:

Cost centre examples include the following:

  • Legal department
  • Research and development department
  • Advertising, marketing department
  • Accounting department
  • D customer service department

Q: Is HR a cost centre?

Ans:

Now, we don't count HR as a cost centre.

Q: What is a cost centre?

Ans:

A cost centre is a division or function in a company that doesn't directly contribute to the profit, but it still costs the business the money it takes to run.

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