RESPONSIBILITY CENTER:

COST CENTER
GROUP 1 STRABA
What is a Cost Center?

- Also known as Expense Center

- Cost Center is a segment of an organization in which
managers are held responsible for the cost or expenses
incurred in the segment.
Purpose of a Cost Center

● To track expenses
● Provide metrics more relevant to internal
reporting
● Improve operational efficiency and maximize
profit
Note:
A cost center isn't always an entire department; it can involve any function or
business unit that needs to have its expenses tracked separately.
 BENEFITS OF A COST
CENTER
Running a cost center is a logistical burden that requires a
company to perform potentially extra work to track, collect,
and analyze information.

However, there are still reasons why a company would

still choose to do so, and each of the benefits highlighted
below are reasons why cost centers can be invaluable to
the long-term success of a company.
BENEFITS OF A COST
CENTER
Cost Tracking and Control

A cost center helps managers to track and control

costs associated with a specific function or
department.

Resource Allocation

Cost centers provide a basis for allocating resources

such as personnel, equipment, and supplies.
BENEFITS OF A COST
CENTER
Performance Evaluation

Cost centers provide a basis for evaluating the

performance of departments or functions within a
business.

Decision-making

Cost centers provide information that can be used in

decision-making.
Evaluation of Cost
Centers’ Performance
MAJOR OBJECTIVE: to carry out its function at the minimum cost

- usually evaluated through the comparison of budgeted to actual costs.

examples: performance reports, feedback reports

 Use of Budgets in Cost Evaluation

A budget is a financial plan that outlines an organization's projected income and

expenses for a specific period of time, typically a fiscal year. It is used in cost
evaluation to help organizations manage their expenses, by comparing actual
costs to budgeted costs, and identifying areas where spending may be exceeding
expectations.

Benefits of using budgets in cost evaluation:

1. Establishing Cost Expectation

2. Facilitating Cost Control
3. Effective allocation of resources
 Use of Budgets in Cost Evaluation
Examples of how this can help managers to measure the success of a project
or business:

1. Variance analysis: If the actual costs of a project are higher than expected due to
unexpected changes in scope, the manager may decide to revisit the project plan and
adjust the scope accordingly.
2. Return on Investment (ROI): If a new product line has a high initial cost, but
generates significant revenue and profits over time, the ROI may be high, indicating
that the investment was a success.
3. Benchmarking: If the actual costs of a manufacturing plant are higher than industry
benchmarks, the manager may decide to review the manufacturing process and
identify areas where costs can be reduced.
 Responsibility Accounting Reports

The main function of a cost center is to track expenses. And in order to track
expenses precisely, the manager must report the cycle using the format above. It
should be reported on a timely basis. Therefore, a responsibility accounting report
contains those items controllable by the responsible manager.
 Controllability of costs
Controllable costs are costs which may be directly regulated at a given level managerial
authority

Guidelines to be considered if it is controllable or not

1. A cost is controllable by a person if he has authority over both the acquisition and use
of the services for which the cost is incurred
2. A cost is controllable by a person if he can significantly influence the amount or the
incurrence of cost through his own action
3. A cost is considered controllable by a person if, though he cannot directly influence the
incurrence of such cost, the management wishes him to be concerned with the cost
items involved so he can help to influence those who are responsible.
 Controllability of costs
Controllability of costs refers to the extent to
which a manager or responsibility center can
influence or control the incurrence of a
particular cost item. Two key factors that
determine the controllability of costs are the
responsibility center and the level of influence.
The responsibility center is the business segment or
department responsible for a particular cost item.
Controllability of costs may vary between different
responsibility centers, as some costs may be
controllable in one center but not in another. For
example, a production manager may have control
over the materials costs in their department, but not
over the marketing costs incurred by the sales
department.
 Controllable Cost and Direct Cost

● Direct costs are costs that can be specifically identified

to a certain responsibility center.
● Controllable costs can be adjusted in the short run.
● Not all direct costs are controllable by the department
concerned.
All controllable costs are direct cost of the department
concerned.
EXAMPLE: CC
● Materials- supply purchase price negotiation
PRODUCTION from suppliers and other departments in the
company such as engineering dept.,
DEPARTMENT ●
purchasing dept.
Factory Overhead- repairs and maintenance of
Production manager has the equipment, electricity usage of the factory,
certain controls over the office supplies cost
production cost. ● Labor- it is a direct cost to the production but
the human resource department handles the
labor expenses of the company such as
allowed overtime payment, Salaries, wages
and bonuses of factory workers, training cost
 Non-controllable cost

● Non-controllable costs refers to expenses that cannot

be influenced by the action of the manager of a certain
department.
● Indirect costs are uncontrollable by the manager of the
segment to which the cost is allocated.
● Can be adjusted in the long run.
EXAMPLE: NCC
PRODUCTION ●
●
Rent of the factory
Depreciation cost of factory equipments
DEPARTMENT ●
●
Insurance cost
Salaries and wages as HR dept handles all cost
related to labor expenses
Non-controllable costs are
● Administrative overhead such as marketing
not in control of the
expense of the products produced, salary of
production manager
other employees outside the department,
salary of the production manager
Illustrative
examples:
Responsibility Cost Report
Illustrative
examples:
Responsibility Cost Report
If the cost items will not be broken down into controllable and uncontrollable
costs, the evaluation of the department's performance might be based on total
costs, which will show an unfavorable variance of P4,000 computed as
follows:
Thank you for
listening!
Reported by Group 1:
Mark James Ian Abrenica
Ashley Agcaoili
Cyree Aquino
Gaibrielle Rayn Asuncion
Jevanie Castroverde
Sarah Joyce Corpuz
Carla Justine Cayaban
Renalyn Davasol
Andrei Carl Edang
Julianne Eusebio
Pamela Mae Quejano
 REFERENCES

Roque, R. S. (1990). Management Advisory Services. Roque Press,

Incorporated.
Tuovila, A. (2022, December 17). Cost Center Definition: How It
Works and Example. Investopedia. Retrieved April 18, 2023, from
https://www.investopedia.com/terms/c/cost-center.asp