Cost Centre Meaning: What is a Cost Centre?
A cost centre is a department in an organization that doesn’t directly profits the organization with any money but needs funds to operate. Unlike a profit centre that generates profit for the organization.
Let’s explore:
So, you might ask; then why do organizations even have these cost centres in the first place?
Well, these cost-centres are designed for financial planning like keeping a track the actual expenses when required and keep them in check and within budget. So, we can say that it profits the organizations indirectly. Who operates these cost centres are Human Resources, administrative departments, and maintenance teams.
Types of Cost Centres
You can find many types of cost centres in different companies as each company can choose what and how many types of cost centres they need to have depending on their requirements.
Sometimes, they may just settle for only some of them as the major goal of these cost centres is to get enough financial and related information and then isolate it for better data collection and reporting.
Here are some of the cost centres you may find 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
A cost centre has multiple benefits for an organization.
- When you have a cost centre in your organization, you have people and leaders who are managing the finances of each department. It eventually helps the company prevents any losses even if these cost centres don’t make direct money for the company.
- Cost centres can help your company provide a better customer experience as the major goal her is not to make a direct profit but to encourage steps that lead the organization towards more success, and eventually make more profit.
- A cost centre can also help you make better decisions with all the right details and insights of finances of all departments.
- These cost centres can help you determine in which department needs more money and resources and support them if they’re struggling.
Cost Centre Examples
So far, we’ve made it clear that the cost centres don’t directly make money for the company instead the company invests in them. But they indirectly contribute to the growth of the company and helps it generate more revenue.
Some examples of the cost centre can be company’s legal team, accounting team, research and development, advertising, marketing, and customer service. None of these departments directly make money for the company. Instead, they make sure that the show goes on and the company’s product and brand stays in the spotlight, so it continues making more profit.
How are Costs Allocated to a Cost Centre?
The cost for each department of cost centre is allocated depending on what resources allocation it needs.
What Is the Purpose of Establishing Cost Centres in an Organization?
The major goal of having cost centres in an organization is that it keeps a track of all the expenses so they can compare them while making company’s budget.
While 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.
How Are Cost Centres Used in Budgeting and Financial Planning?
These cost centres help you with budgeting and financial planning by giving you a structured framework for where you should allocate which of the resources. That way, you can allocate funds the right way, keep a track of them, and set realistic budgets for the target department to support their function properly.
This is a great way of enhancing financial control at your company, using information the right way to make better decisions, and ensure that the resources are evenly distributed to the departments that need it.
How do Cost Centres Work?
The companies establish different departments and teams within their organization that their managers and leaders monitor and control. These managers keep a track of the expenses in different areas for that department.