Cost center: what is a cost center?
In controlling, a cost center denotes a cost-generating element in cost accounting, more precisely: cost center accounting. Services are billed to a cost center so that they can be billed internally. This process is usually used for operational controlling in accounting. You could also say that the cost centers are sub-departments in a company. The individual cost centers are usually formed by areas of responsibility as well as spatial and functional aspects.
The most common cost centers
Depending on the characteristics in controlling, you can discover the following structure of the cost center; these are common main cost centers in cost accounting. For most companies, this cost center plan can be suitable for their own cost center accounting, but other structures in cost accounting can also be useful depending on the business purpose.
- Production / assembly
- quality assurance
- Work preparation
- Research and Development
- Managing directors
- Accounting / finance / controlling
- human Resource
- Factory outlet / direct sale
Note: These points are the most common main cost centers. Depending on the company, there may also be other cost centers. Here every company can adapt its controlling to its own needs to the cost center accounting and thus get the most out of the cost accounting. In addition, the organization of the cost center is recorded in a cost center plan in practice.
Cost centers: areas of responsibility of a company
According to aviationopedia.com, a cost center is a delimited area of a company for which the costs are determined separately. on the one hand the costs are monitored, on the other hand costs can be added to the originator. This polluter pays principle is primarily used for cost controlling, so overhead costs are assigned to the polluters and they are motivated to save. The cost centers are always divided according to spatial, organizational, functional and accounting criteria. This then leads to the following fundamental distinction:
- The main cost centers: The costs that are incurred are offset against the individual cost units with the help of calculation surcharges
- The auxiliary cost centers: The costs incurred here are allocated to the main cost centers – this is an internal cost allocation
- The ancillary cost centers: These record the costs of ancillary production – for example the recycling of waste, and are offset directly against the by-products using surcharge rates.
What is a cost center used for?
Regardless of the size of the company, cost accounting is one of the most important business instruments. The company’s success can be measured through cost accounting. In addition, cost center accounting is used to provide the company with important internal information for well-founded decisions. The question of which part of the company needs the most IT support, for example, is answered by evaluating the cost center with regard to the type of cost. In order to answer this question, IT has to bill the respective cost centers for their expenses.
Even if there are no legal requirements, a tripartite division of cost accounting has become established. The place where the costs arise is the cost center and here the polluter pays principle applies – so the central question is: Where are the costs incurred? In addition to the cost center, there is also the cost unit. This is very clearly understandable and the question here is: What are the costs? Thus, the cost center as well as the cost unit is an important point for cost accounting.
The cost accounting and controlling provide the company with precise information about which costs have been incurred and at the same time how these costs have been incurred and which services result from them. In this way it can also be tracked whether the costs have generated a real equivalent.
The cost center and the cost unit therefore serve to answer a wide variety of questions to the company. Cost accounting can provide information on these issues:
- How does profit change if it succeeds in increasing production by 10%?
- Which department causes the lowest costs, i.e. works the most efficiently?
- What are the costs for the company in the next season?
- Why are the costs much higher than originally planned? Where did they come from?
- Should a product element be better manufactured in-house or should it be better bought?
The cost center is always an independent area of responsibility
In order to ensure effective cost control, it is important that the cost center always remains an independent area of responsibility. After all, the cost center manager must be able to control the costs himself. In addition, it should always be a spatial unit so that there is no overlapping of competencies. In addition, for each cost center the most precise possible measure of the cost causation is found, because otherwise there is a risk that the cost control and the calculation is / will be incorrect. In addition, it must be possible to easily post every cost document to the cost center.
With these things an optimization problem of the controlling can be recognized in the cost center allocation. Because the more precise the cost center division is, the sooner it is possible to find exact measures of the cost causation and the more precise the cost control can be, as well as the calculation and the relevant costs. On the other hand, fine adjustment of the cost centers means higher billing costs within cost center accounting. Because the account assignment of the documents is clearly more complex.
When it comes to the optimal degree of fineness of the division of the cost centers, then this can be defined with the following rule: If the division of the cost centers is too coarse for the calculation, then this is also too coarse for the cost control of the cost center! How the classification should look depends on the individual company factors: company size, industry, production program and processes, organizational structure, the desired accuracy of the calculation and the desired cost control options define the level of detail of the cost center accounting within controlling.
The formation of cost centers
As already explained, it is possible to create the cost centers and their structure in controlling according to a wide variety of criteria, such as:
- Materials, manufacturing, administration and sales
- Area of responsibility
- Spatial aspects
- Machine workplaces
- Billing aspects
- Main cost centers
- Ancillary cost centers
- Auxiliary cost centers
Examples of cost centers
The material area contains, for example, all cost centers or departments that have to do with the material or the procurement of the material in the broadest sense:
- shopping Department
- Incoming goods inspection
- Inbound logistics / inbound warehouse etc.
Thus, the administrative area includes, for example, the cost centers or cost centers:
- Financial accounting
- Controlling etc.
In practice, when dividing the cost centers for a company, it usually happens that several of the above criteria apply at the same time.
The cost centers of a company are recorded in the cost center plan and each cost center is usually given a cost center number such as “Domestic Sales” or “080”, which is then recorded on invoices relating to the cost centers or department.