A cost centre is a department within a business to which costs can be allocated. The term includes departments which do not produce directly but they incur costs to the business, when the manager and employees of the cost centre are not accountable for the profitability and investment decisions of the business but they are responsible for some of its costs. Types There are two main types of cost centres: Production cost centres, where the products are manufactured or processed. Example of this is an assembly area. Service cost centres, where services are provided to other cost centres. Example of this is the personnel department or the canteen. Examples Marketing department Human resources Research and development Work office Quality assurance Engineering Logistics Procurement Cost centres can be trimmed down to the smallest segregated tasks within Departments. It is not necessary to consider departments as outright cost centres. Some companies adopt a different approach when treating cost centres. Function-specific cost The main function of a cost centre is the tracing of all expenses linked with a certain function. For example, by considering a call centre as an independent unit, the firm can calculate how much it is spending each year for its call centre support service. If a cost centre is not considered independent then it would take a lot of effort in measuring the cost of providing this service because it will include dividing up the company's entire personnel and phone bills by department each month. Benefits There are numerous benefits of a cost centre which include: Monitoring efficiency – Cost centres are beneficial as they allow the effectiveness of all aspects within a company to be monitored closely. Employee confidence – The delegation of authority that takes place when making employees accountable for cost centre is a way to improve confidence. Loss prevention – Cost centres try to update processes, be more effective and save money so that they can reduce the expenses. Cost centres try to cover all of their costs with offsetting revenue by reducing expenses and producing unpredicted revenue, thus preventing loss. Increasing profit – If one of the cost centres is removed from a firm then it has a negative impact on the profit margin of that firm. For example, if an HR department was removed then basic employment functions and essential business processes cannot be performed which will affect the firm's profit negatively. Management