What Is Cost Centre: Definition, Function & Examples
It is essential to the success of every business to track its income streams and costs. As a small business owner, doing so will aid you in making effective business strategies and accurate budgets. One of the most influential aspects of budgeting is cost centre.
This is a part of your business that doesn’t directly generate money. In this guide, we’re going to show you why cost centre is so important to your business, how they work, and more.
Here’s What We’ll Cover:
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.
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 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.
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 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.
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.
And lastly, there’s the service cost centre. This can apply to your janitorial staff, for example.
Why You Need Cost Centres
Cost centres bring value to the entire departments or roles they are associated with. What’s more, cost centres assist your company in making a profit. Although cost centres don’t generate their own profit, they are fundamental in generating it elsewhere in your company.
Your business might need more cost centres than what it currently has. It’s possible that you could gain more profits by adding another cost centre. Examine the cost centre types above and see if you could implement any additional ones.
If you need help managing your existing cost centres, we invite you to download FreshBooks. FreshBooks empowers you with essential accounting tools to keep your business running smoothly. You can even try it for free for 30 days. It will change the way you run your company.
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