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A cost centre is a department within a business to which costs can be allocated. The term includes departments which does not produce directly but incurs costs to the business, when the manager and employees of the cost centre are not accountable for the profitability and investment decisions of the business but they are responsible for some of its costs.
There are two main types of cost centres:
The main function of a cost centre is the tracing of all expenses linked with a certain function. For example, by considering a call centre as an independent unit, the firm can calculate how much it is spending each year for its 1-800 support service. If a cost centre is not considered independent then it would take a lot of effort in measuring the cost of providing this service because it will include dividing up the company's entire personnel and phone bills by department each month.
There are numerous benefits of a cost centre which include:
There are a few drawbacks of cost centre which include:
A cost centre adds to a firm's cost whereas a profit centre adds to the firm's cost and profit. Furthermore, the main objective of a cost centre is to minimise cost whereas the main objective of a profit centre is to maximise profit. Profit centres provide a wider and more general measurement of performance than the cost centre. In cost centre, the manager is only responsible for the cost whereas in a profit centre, the manager is responsible for cost and profit. In situations like this when manager is responsible for both, profit and cost, the contribution of each manager to the goal of the firm becomes easier to measure.
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