cost center

Cost center is a center that is basically established with the intention to save costs.

Eg. Almost all BPOs are Cost centers. They have opted to have there centers in developing countries like INDIA, to save cost.

A cost center is an area of your business that you primarily operate to service the needs of one or more profit centers. A typical example of a cost center may be a combine. Unless you do a lot of custom harvesting you don't operate a combine to earn a profit; but rather, to supply harvesting services to corn, soybeans, wheat, or other profit centers.

The main reason for identifying cost centers in your operation is to figure out how much those services are costing. In the case of a combine, this information can help you make decisions about repair or replacement..."How much did I spend on combine repairs last year?"...or whether you should be hiring custom harvesting instead of owning the machinery yourself.

Generally speaking, you should identify no more than a few important cost centers in your operation. Otherwise accounting for them will become a burden.

thanks

Dear Prasad,

U need to identify and define the cost centre. Devise ways to collect cost centre data for each and every expenses incurred in company.The said expenses should be approved by cost centre head. The cost centre head will usually be Vice President of that department / section. He will be answerable for the deviation in expenses head in relation to budgeted figure.

The MIS should be prepared in such a way that expenses related to each costcentre wise is collated and such expenses head is furthur segregrated to variable cost and fixed cost. The time series report of such data will hen reflect the contribution per activity ie. Revenue less Variable cost. This gives clear picture regarding the pricing of each activity / services.

Rgds./Nitesh

please explain cost centre and profit centre conept for transport company.

You need to identify cost centers based on the kind of cost visibility / cost information you need, the decisions that you intend to take from those visibility / information.

For e.g an entire factory can be a cost center or a single machine can be a cost center, or a pool of machines can be a cost center.

From a service perspective. A pool of activities / function can be a cost center or an entire location can be a cost center.

You need cost center for cost accumulation. However, there has to be a benefit - cost analysis of the kind of information that you need and the kind of decisions those information are likely to impact.