Cost center
A cost center 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.
As a Noun:
A
part of an organization to which costs may be charged for accounting purposes.
A cost center is a department within an
organization that does not directly add to profit but still costs the
organization money to operate. Cost centers only contribute to a company's
profitability indirectly.
Merits:-
1)
Motivation to Employees: - Making employees accountable for cost center is a good way to improve confidence and give them a motivation for work
efficiently.
2)
Gain up loss down: - They allow you to manage and control money. They
allow the business to identify which areas are most profitable.
3)
Cost control: - Facilitates cost control by
checking and correcting undue, undesirable or unexpected movements in cost.
4)
It enhances performance measurement
5)
Makes the manager more efficient: - Managers compare cost data from different
time periods in order to see whether the cost center is becoming more or less
profitable.
6)
Less expensive: - Cost centers are beneficial as they allow the
effectiveness of all aspects within a company to be monitored closely.
7)
Helps to find out and show the trends in cost
variances of each cost center.
Demerits:-
1)
Profit cannot be controlled:- Divisional
performance can only be evaluated in terms of cost because profit is not in
control of the manager.
2)
Senior managers may be unable to recognize
whether a cost or profit center is running effectively / ineffectively.
3)
It enhances performance measurement.
4)
Efficiency and productivity cannot be
assessed properly: - In a cost center, the result of a decision is calculated
by cost alone; the achievements of the cost center are not measured in
financial terms, therefore it is hard to assess efficiency and productivity
properly.
5)
Cost and profit centers may add to pressures
and stress on staff
6)
In practice, it may be difficult to allocate
costs to a particular division / center.
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