Meaning of Cost Centre:

CIMA defines Cost Centre as “a production or service, function, activity or item of

equipment whose costs may be attributed to cost units. A cost centre is the smallest
organizational sub-unit for which separate cost allocation is attempted.”
Cost Centre is a location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control. From functional point of view, a cost centre may be relatively easy
to establish, because a cost centre is any unit of the organization to which costs can be separately
attributed.
A cost centre is an individual activity or group of similar activities for which costs are accumulated.
For example in production departments, a machine or group of machines within a department or a work
group is considered as cost centre. Any part of an enterprise to which costs can be charged is called as
‘cost centre’.
A cost centre can be:
(a) Geographical i.e., an area such as production department, stores, sales area.
(b) An item of equipment e.g., a lathe, forklift, truck or delivery vehicle.
(c) A person e.g., a sales person.
A machine can be a cost centre by charging all costs relate to it. Those costs may be depreciation,
maintenance, power, consumable, share of rent and establishment expenses, heating and lighting etc.
A sales person can be treated as cost centre by charging all costs relating to him like salary,
commission, travel expenses, postage and telephone, samples, entertainment expenses etc. The procedure
of allocation of overheads involves identification of cost centres for which an item of expenditure is a
direct cost.
The establishment of cost centre will help to achieve the following:
(1) There is a clear-cut responsibility placed on a person who is held responsible for control of
expenditure in his cost centre.
(2) Cost centre-wise recovery of cost is possible, since costs are collected and accumulated in a
cost centre and distributed over the products for recovery of incurred cost.
Cost Centre: What Is It?
The average cost centre can be either a physical department or a role carried out by staff. It doesn’t
generate actual revenues of its own, but it does cost your company money. As such, a cost centre often
applies to administrative roles or customer service departments.
Moreover, you wouldn’t be able to do away with your company’s cost centre to save money. This is
because cost centres are critical to the overall operations of your business.
Examples of Cost Centres
There are many possibilities for fulfilling the role of a cost centre. Some common examples of cost centres
include but aren’t limited to:
Customer service departments
Human Resources personnel
Warranty departments
HR departments
IT departments
Janitorial staff
 As you can see, these are all departments or roles that are essential in keeping your business
operating smoothly. Therefore, you wouldn’t be able to feasibly do away with one or all departments and
roles to save money.
Your business might have several cost centres or very few. How many a company has is often
based on its size. Larger corporations often employ numerous cost centres, whereas a small business
might have only a few.
When listing cost centres among your business expenses, they must be listed separately. This
makes it easy to monitor the resources that cost centres use. Your internal management staff keeps your
cost centres efficient and within budget.
Cost Centre Types
There are typically six cost centre types found in businesses. And while they don’t provide profits
to your company or raise money, they are essential to keeping your business running. Let’s explore these
six types to give you a better understanding of their importance.
Impersonal
The impersonal type deals with machinery, equipment, or locations. Moreover, they might serve
to focus on production involving machinery, equipment, or locations. Let’s assume that you have an
R&D department with a budget to come up with new ways to solve customer issues or design brand-new
products. Such responsibilities would be the role of the impersonal cost centre.
Operation
Operation cost centres have to do with the people or machinery that engage in the impersonal
responsibilities. For instance, an IT department makes sure that your network and related equipment
function properly.
Personal
This cost centre deals with a person or persons, such as an HR department. Your HR department
handles issues among all other departments in your company.
Product
Product cost centres focus on a product or an area in your company where manufacturing takes
place. For example, let’s say you own a mobile phone accessory company. Your product cost centres
could be development departments that produce cases and chargers.
Process
As its name implies, a process cost centre is an administrative department that processes specific
actions or needs. For instance, your customer service department that handles complaints.
Service
Service cost centers provide services to the company. For example, a janitorial staff maintains
clean, orderly facilities so that employees can be healthy, safe and productive.