You are on page 1of 4

For any business it is important to have an understanding of how much it costs to run various parts of the company, for

example a department or a machine in that department. Without this specific knowledge the business might find itself subsidising loss making departments or machines without knowing it. In other words the loss made by a particular cost unit is compensated for by the profits of other units. Knowing which parts of the organisation are profitable and which run at a loss makes it possible to cut out loss making units. Cost centres are part of the organisation structure of the business. Costs are related to the department or section of the organisation that incurs them. A cost centre is a location, function or items of equipment in respect of which costs may be ascertained and related to cost units for control purposes. A printing firm has printing presses costing 1m each. It may be decided that each machine is to be a cost centre. A television company consists of a number of departments including: make-up, programming, advertising, and public relations. It is decided that each of these departments will be a cost centre.

Cost units
As well as using cost centres another important way of costing is to determine the cost per unit of production or sales. For example, in a printing firm producing books, each book can be counted as a cost unit. The purpose of a costing exercise is to determine the cost of a cost unit, therefore all costs should be allocated to cost units whenever possible. Only when costs cannot be attributed to a specific product are they to be charged to a cost centre - for example, take two costs incurred in a workshop of a garage, the wages of a mechanic working on customers' cars and the cost of electricity used for powering workshop tools and lighting. The wages of the mechanic can be identified with cost units provided a record is kept of how time has been spent, e.g. by each repair or service job, but it is not practical to record the electricity attributable to specific jobs. This cost should be allocated to the cost of running the workshop (i.e. it is a cost centre cost). If we can break up an organisation into cost centres to see how much machines, departments, or other components cost to operate we can also divide the organisation into profit centres. In a profit centre we will need to look at the costs associated with running that centre and the revenues to calculate the profit. For example, an organisation like the BBC can be split into profit centres and each can be set profit targets to work towards. Dividing an

organisation into profit centres makes it possible to identify the parts of the organisation that generate the profits and the parts that do not. Read more:

it is a smaller segment of activity or area of reponsibility for which cost can be accumulated Cost centers are divisions that add to the cost of the organization, but only indirectly add to the profit of the company. Examples include Research and Development, Marketing and Customer service. in a cost center,activities are done for the betterment and devlopement of company's sale,product,customer satisfaction and all such cost are combined in cost center. cost,profit,and investment center A cost center is one which is responsible only for the control of costs it does not concern itself with pricing of products or even investing the surplus in a fruiful manner,its only concern is with respect to managing the costs it encounters. Cost centres are the various departments to which various kinds of costs are allocated. In layman terms-If the executive of Administrative department drinks the coffee than the cost can not be charged to maufacturing department but to administrative

department. Technical terms pkgng cost is allocated to sales n distb department. Cost of raw material to manufacturing dept and so on. For more referance-meheshwari and mittal A resopnsibility centre which takes only input in terms of Cash inflow but doesn't provide any output in terms of Cash outflow is known as cost centre. Cost centres help organisations indirectly in improving revenues and profits like- R&D department can help in producing good products and increase the sale. As every responsibility centre works individually, cost centre is not concern with decisions of other resoponsibility centres like investment, sale, pricing, profit etc.

A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include research and development departments, marketing departments, help desks and customer service A department or other section of a company where managers are directly responsible for costs. For example, consider a company that has a manufacturing department, a research and development department, and a payroll department. Each

department could be a cost center, and the directors of each department would be responsible to keep costs to as low a level as possible. The company thus accounts for each cost center separately, which allows managers to take immediate responsibility for cost growth and credit for cost cutting. Cost centre is defined as"a location or person or place or machine or thing for which cost can be ascertained and used for the purpose of cost control."