Cost Centre: Types, Examples and Purpose

Efficient budgeting is a crucial requirement for running a successful business enterprise. A firm’s budget in a financial year is divided into two major centres – profit and cost. While profit centres are essential instruments that specifically contribute to a company’s profitability, cost centres indirectly contribute to profit making. This article discusses the concept of a cost centre and how firms value this statistic.

Cost centres are instruments that do not directly add to the production line but incur running costs. They are not accountable for determining crucial parameters like profits and investment decisions.

The functioning of a cost centre is given below: 

• Provides Crucial Statistics

Cost centres provide useful statistics for determining a company’s growth and sustainability. Consider a company involved in manufacturing biscuits and cakes on a large scale. While ovens and raw materials directly contribute to the profit-making, legal, accounting or marketing departments do not.

Although cost centres are not directly related to profit-making, they help the firm determine their manufacturing expenses and increase the possibility of consumer retention through online and offline advertisements.  

• Aids in Fund Management

The cost centre aids fund management and helps managers allocate funds to various departments. Thus, a company can include staff income payments, team projects expenses on conveyance, etc. Managers can express these expenses as per business unit, employee or department, etc., while keeping the costs in mind.

• Helps Track Costs and Budgets

Since cost centres are individual ledgers from the accounting perspective, they can track costs and budgets. On a broader scale, they help strengthen finance and can manage responsibilities. Cost centre monitoring can therefore serve to minimise costs.

Cost centres have a catalytic effect on a business’s revenue generation. Six different types of cost centres indirectly add to productivity. They are as follows:

• Impersonal cost centres: A firm can efficiently carry on with its production process by utilising equipment and machinery. Cost centres of this type are concerned with research and development that aim to improve the user/customer experience without necessarily contributing to revenue making.
• Operation cost centres: The Information technology department of a company aims to find innovative solutions for hardware, software or networking. Thus, they are concerned with securing operations and updating server systems.
• Personal cost centres: Synonymous to research or equipment division, personal cost centres are meant to deal with people. The human resource department, for example, caters to the needs of the employees in accordance with the company's requirements.
• Product cost centre: Investments in specific products or manufacturing areas constitute the product cost centres. A baking firm, for example, may have a baking department strictly responsible for baking cakes, biscuits and cookies, etc. Similarly, they may also have separate departments for icing, cookie making or special orders.
• Process service centre: Firms must handle several processes simultaneously to keep their business running. The baking company, for example, may employ a social media marketing unit to advertise their products, interact with customers and accept complaints or special requests.     
• Service cost centre: Companies have certain service-providing units to help revenue-making. A messenger boy, for example, may help keep the office clean and tidy apart from assisting other employees in fulfilling their duty.

Cost centres have a catalytic effect on a business’s revenue generation. Six different types of cost centres indirectly add to productivity. They are as follows:

• Impersonal cost centres: A firm can efficiently carry on with its production process by utilising equipment and machinery. Cost centres of this type are concerned with research and development that aim to improve the user/customer experience without necessarily contributing to revenue making. 

• Operation cost centres: The Information technology department of a company aims to find innovative solutions for hardware, software or networking. Thus, they are concerned with securing operations and updating server systems. 

• Personal cost centres: Synonymous to research or equipment division, personal cost centres are meant to deal with people. The human resource department, for example, caters to the needs of the employees in accordance with the company's requirements. 

• Product cost centre: Investments in specific products or manufacturing areas constitute the product cost centres. A baking firm, for example, may have a baking department strictly responsible for baking cakes, biscuits and cookies, etc. Similarly, they may also have separate departments for icing, cookie making or special orders.

• Process service centre: Firms must handle several processes simultaneously to keep their business running. The baking company, for example, may employ a social media marketing unit to advertise their products, interact with customers and accept complaints or special requests.     

Service cost centre: Companies have certain service-providing units to help revenue-making. A messenger boy, for example, may help keep the office clean and tidy apart from assisting other employees in fulfilling their duty.

Experts consider cost centres essential when it comes to determining the cash flow and cost allocation. Although they do not contribute directly to profit-making, business organisations can easily track their expenses with cost centres. 

Some purposes of maintaining cost centres are as belo

• Cost alignment: Cost centre managers are responsible for aligning costs with the budget without contributing directly to profit making. For example, the human resource or operations department aids in cost allocation and striking a balance between the various departments. 
• Mirror to a company’s financial status: With proper budget segmentation and resource allocation, cost centres can directly reflect the financial condition of an organisation. Expenses on cost centres reveal the income generation capacity of profit-centric departments.  
• Enhancing value: Despite their no involvement in revenue generation, cost centres can enhance product values and improve a business’s chance of being noticed by potential customers. Cost centres can utilise certain tools like analytics and management to understand customer behaviours and improve customer retention.