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Definition, Function and Examples
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A cost center is a role or department that costs the business money but does not generate revenue on its own. They are often administrative, service and support roles. These positions cannot be eliminated to cut costs because they are vital to a smoothly operating organization.
Cost centers can be individual roles, like janitors or human resource personnel, or full departments, like IT departments or warranty departments. The size of a cost center and how many cost centers there are will vary due to company size and industry. Cost centers are listed as separate units in the business so that the resources they use can be easily monitored. Managers are responsible for ensuring that the centers run efficiently and stay within budget.
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There are six major types of cost centers that do not generate profits on their own but are all important to the core functions of the business.
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Impersonal cost centers deal with equipment, machinery or locations. They may focus on locations, equipment, production or machines. For example, a research and development department has a budget to find innovative solutions to consumer problems or design new products.
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Operation cost centers are concerned with people or machines engaged in similar activities. For example, IT departments make sure that hardware, software and networks are all working correctly, properly updated and secure.
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Personal cost centers deal with a particular person or group of people. For example, a company’s HR department works across departments to deal with employee needs and recruitment.
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Product cost centers deal with a specific product or manufacturing area. For example, a publishing company may have a production department responsible for the actual printing of its books, newspapers or magazines. A manufacturer might have assembly, painting or welding shops.
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Process cost centers focus on a specific process or event. For example, customer service departments handle customer complaints, improve customer experience and manage any warranties or rebates that might be available.
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Service cost centers provide services to the company. For example, a janitorial staff maintains clean, orderly facilities so that employees can be healthy, safe and productive.
For example, a small company might have a cost center that is simply an office manager or bookkeeper who manages office administration and bookkeeping. Alternatively, a multinational corporation might have separate cost centers such as human resources (HR), accounting department and administrative staff.
Related: Operations Management: Everything You Need To Know
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Cost centers are important because these departments add value to the company. These departments and roles allow the rest of the business to make a profit. Here are some reasons why cost centers are important for running a company:
???????? ?????????????? ???????????????? ????????????????????.Customer service departments help customers resolve complaints, find products and understand any warranties or company policies. Excellent customer service builds company value and can create a loyal customer base.
They maintain buildings and equipment. Information technology (IT) departments, maintenance workers and janitorial staff help ensure the company's equipment is running correctly and that the facilities are clean and safe. These workers make sure the business can generate profit and help keep its staff healthy.
???????? ???????????????? ?????????????????? ?????? ??????????????????. Research and development departments find innovative solutions to consumer problems and design new products.
???????? ?????????????? ???????? ???????????????? ?????? ?????????????? ???????????????? ????????????????????. Data and market analysis departments help companies understand consumer trends and changes in their industry. These departments provide the information needed to analyze how effective a current business strategy is and identify opportunities for improvement.
???????? ???????????? ???????????????????????????? ??????????. These roles include office staff, HR and accounting departments. They ensure that the company is submitting reports and forms accurately and managing payroll and budgeting and in-office organization as well as completing many other important administrative tasks.
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Cost centers are given their own categories in the general ledger so that the accounting team can track costs and allocate resources. Managers typically are responsible for the department’s budget and everyone assigned to the cost center. Their duties may include:
Helping the finance and accounting department understand your business The finance and accounting department will assign cost centers based on your business needs and how you spend your money. They can have a broader perspective of budgeting needs than individual cost center managers and can help structure resource allocations to be more efficient over time.
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Cost centers should be created with a set of parameters that include the scope of their work and details about managing vendors, accounts and products. You should be clear about your purchase order procedures, what vendors are approved for ordering and how invoices are handled.
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Cost center managers should be held responsible for managing the budget of the cost center. This responsibility should be listed in their management objectives. You should avoid assigning a manager multiple cost centers unless there is a very good reason. Cost center managers should also have a clear idea of the cost center's primary goals so that they can effectively manage the budget they are given.
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Cost centers should have clear budgets and cost center managers should track their spending. This allows cost center managers and the finance and accounting department to understand what resources each cost center uses, how those resources are allocated within the cost center and what changes need to be made in the next fiscal year.
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You lower your costs by tracking your cost centers for personnel inefficiencies, overspending and other expensive challenges. The data you gather from disciplined cost center structures can guide reorganizations and inform future budget allocations. Communicating cost management techniques and goals with your cost center managers will help immensely.