Budgeting Basics and Beyond

22.4. Cost Center

A cost center is typically the smallest segment of activity or responsibility area for which costs are accumulated. This approach usually is employed by departments rather than divisions. A cost center has no control over sales or marketing activities. Departmental profit is difficult to derive because of problems in allocating revenue and costs.

A cost center is a department whose head has responsibility and accountability for costs incurred and for the quantity and quality of products or services. For example, the personnel manager is accountable for costs incurred and the quality of services rendered. The production manager compares expected and actual costs and quantities as a measure of productivity.

Examples of cost centers are a maintenance department and fabricating department in a manufacturing company.

Although a cost center may be relatively small, it also can be very large, such as an administrative area of an entire factory. Some cost centers may consist of a number of smaller cost centers.

A cost center is basically responsible for direct operational costs and meeting production budgets and quotas. Authority and responsibility must be under the control of the department head, usually a foreman.

In the cost center approach, budgeted cost is compared to actual cost. Variances are investigated, necessary corrective action is taken, and efficiencies are accorded recognition. This topic is covered in detail in Chapter 8.

The cost center approach is useful ...