Cost Centre - Accounting Media

Cost Centre

Cost centre is defined as a location, person or item of equipment (or group of them) in respect of which costs may be ascertained and related to cost units for the purposes of cost control. It is the smallest segment of activity or area of responsibility for which costs are accumulated.

Thus cost centres can be of two kinds, viz.
(a) Impersonal cost centre consisting of a location or item of equipment (or group of these) such as machine shop, and
(b) Personal cost centre consisting of a person or a group of persons such as factory manager, sales manager, etc.

Cost centres are also classified in manufacturing concerns into production and service cost centres. Production cost centres relate to those centres where production or manufacturing activities take place. Service cost centres are those, which are ancillary and render services to the production cost centres, so that manufacturing activities can take place. In a biscuit manufacturing company, making, baking and packing are production cost centres while personnel, purchase, stores, canteen, accounts are service cost centres.

The main purpose of cost centre is two fold :–
(i) Recovery of cost: Costs are collected, classified and accumulated in respect of a location, person or an item of equipment and then the costs are distributed over the products for recovery of incurred cost, and
(ii) Cost control: Cost centres assist in making a person responsible for the control of expenditure incurred by the cost centre. Manager of each cost centre shall control costs incurred in his area of responsibility.

The size of the cost centre depends on the activity and operation, and feasibility of cost control. Sub-cost centres are created if the size of the cost centres become too big from control point of view.