Cost centre (business)

Cost centre (business)

In business, a cost centre or cost center is a division that adds to the cost of an organization, but only indirectly adds to its profit. Typical examples include research and development, marketing and customer service.[1] There are some significant advantages to classifying simple, straightforward divisions as cost centres, since cost is easy to measure. However, cost centres create incentives for managers to underfund their units in order to benefit themselves, and this underfunding may result in adverse consequences for the company as a whole (for example, reduced sales because of bad customer service experiences).

Because the cost centre has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut. Operational decisions in a cost centre, for example, are typically driven by cost considerations. Investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures.

Business metrics are sometimes employed to quantify the benefits of a cost centre and relate costs and benefits to those of the organization as a whole. In a contact centre, for example, metrics such as average handle time, service level and cost per call are used in conjunction with other calculations to justify current or improved funding.[2]

See also

References

  1. ^ "Oxford University Press. Encyclopedia.com". 2006. http://www.encyclopedia.com/doc/1O18-costcentre.html. Retrieved 2009-04-14. 
  2. ^ "BT Pipe". http://www.bitpipe.com/tlist/Business-Metrics.html. Retrieved 2009-04-14. 



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