Cost centre

Definition

A cost centre is a location, department, function, machine, or person where costs are collected and controlled, but which does not directly generate revenue (e.g., Maintenance Dept., Cutting Machine M1, Customer Service Team).

Fact (core points)

1. Primary purpose: accumulate, classify, and control costs.
2. Basis for budgeting, variance analysis, and responsibility accounting.
3. Costs from cost centres are later allocated/apportioned to products, services, or profit centres.

Elaboration

Why use cost centres?

They make costs traceable to the part of the organization that causes or controls them—improving accountability and cost control.

Types of cost centres:

1. Production/Operational – directly engaged in making the product (e.g., Mixing, Assembly).
2. Service/Support – assist production (e.g., Maintenance, Stores, Powerhouse, HR).
3. Personal (a person/team) vs Impersonal (a location/machine/department).
4. Machine vs Labour oriented – depending on what mainly drives cost.

Cost centre vs. profit centre:

A cost centre is evaluated on cost control; a profit centre on profit (revenue − cost).

Cost centre vs. cost unit:

A cost centre is where costs are collected; a cost unit is what costs are stated per (e.g., per litre, per room-night).

Allocation & apportionment:

• Directly attributable costs (e.g., operator wages) are allocated to that centre.
• Common costs (e.g., factory rent, utilities) are apportioned using fair bases (floor area, kWh, headcount, machine-hours).

Examples (by industry/function)

Industry/Area	Typical Cost Centres	Allocation/Apportionment Bases
Manufacturing (electronics)	Soldering Line, QA Lab, Tool Room, Maintenance	Direct labour hours, machine hours, test minutes, number of breakdowns
Food processing	Mixing Dept., Bottling, Cold Storage, Utilities/Boiler	Batch hours, bottles filled, cubic metres refrigerated, kWh
Hospital	Operating Theatre, Radiology, Pharmacy, Housekeeping	Theatre hours, scans taken, prescriptions dispensed, floor area
University	Lecture Halls, Library, IT Support, Admissions	Student-hours, book issues, tickets resolved, applications processed
Retail chain	Receiving Bay, Store Operations, Customer Service Desk	Pallets handled, store hours, calls handled
Hotel	Housekeeping, Front Office, Laundry, Engineering	Rooms cleaned, check-ins, kg of linen, maintenance work orders
Software/IT	DevOps, Helpdesk, QA Test Lab	Server-hours, tickets, test cases executed
Logistics	Sorting Hub, Linehaul, Vehicle Maintenance	Parcels sorted, km driven, vehicle downtime
Construction	Site Office, Crane Operations, Safety Team	Project months, crane hours, site inspections

Tiny numeric illustration

A factory has two cost centres in April:

• Machining (production):

Direct wages RM40,000; Machine depreciation RM30,000; Power (metered) RM10,000 → Total RM80,000

Activity: 4,000 machine-hours → RM20 per machine-hour

• Maintenance (service):

Salaries RM18,000; Supplies RM2,000 → Total RM20,000

Service provided: 500 maintenance orders → RM40 per order (used to charge jobs/departments served)

These centre rates (RM20/MH, RM40/order) are then used to charge costs to products/jobs before computing unit cost.

Quick checklist to design cost centres

1. Reflect responsibility (who can influence the costs?).
2. Homogeneity (similar activities/cost drivers within the centre).
3. Measurable drivers (e.g., machine-hours, floor area, tickets).
4. Cost-benefit (detail level should aid control without being burdensome).
5. Consistency (same structure across periods for trend/variance analysis).