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A cost center is a department within a business to which costs can be allocated. The term includes departments which do not produce directly but incur costs to the business, when the manager and employees of the cost center 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 centers:
Cost Centers can be trimmed down to the smallest segregated tasks within Departments. It is not necessary to consider departments as outright cost centers. Some companies adopt a different approach when treating cost centers.
The main function of a cost center is the tracing of all expenses linked with a certain function. For example, by considering a call center as an independent unit, the firm can calculate how much it is spending each year for its 1-800 support service. If a cost center 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 center which include:
There are a few drawbacks of cost center which include:
A cost center adds to a firm's cost whereas a profit center adds to the firm's cost and profit. Furthermore, the main objective of a cost center is to minimise cost whereas the main objective of a profit center is to maximise profit. Profit centers provide a wider and more general measurement of performance than the cost center. In cost center, the manager is only responsible for the cost whereas in a profit center, 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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