A manager in a cost center also has responsibility and authority over the revenues and the costs.

What Is a Cost Center?

A cost center is a department or function within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company's profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions. Managers of cost centers, such as human resources and accounting departments are responsible for keeping their costs in line or below budget.

Key Takeaways

• A cost center is a function within an organization that does not directly add to profit but still costs money to operate, such as the accounting, HR, or IT departments. 
• The main use of a cost center is to track actual expenses for comparison to budget.
• A cost center indirectly contributes to a company’s profit via operational excellence, customer service, and enhanced product value.
• The manager for a cost center is only responsible for keeping costs in line with budget and does not bear any responsibility regarding revenue or investment decisions.

How a Cost Center Works

A cost center indirectly contributes to a company’s profit through operational efficiency, customer service, or increasing product value. Cost centers help management utilize resources in smarter ways by having a greater understanding of how they are being used. Although cost centers contribute to revenue indirectly, it is impossible to discern the actual revenue generated. Any associated benefits or revenue-producing activities of these departments are disregarded for internal management purposes.

The main function of a cost center is to track expenses. The manager of a cost center is only responsible for keeping costs in line with budget and does not bear any responsibility regarding revenue or investment decisions. Expense segmentation into cost centers allows for greater control and analysis of total costs. Accounting for resources at a finer level such as a cost center allows for more accurate budgets, forecasts, and calculations based on future changes.

Important

Cost centers aren’t always entire departments; it can involve any function or business unit that needs to have its expenses tracked separately.

Cost centers provide metrics more relevant to internal reporting. Internal management utilizes cost center data to improve operational efficiency and maximize profit. External users of financial statements, including regulators, taxation authorities, investors, and creditors, have little use for cost center data. Therefore, external financial statements are generally prepared with line items displayed as an aggregate of all cost centers. For this reason, cost center accounting falls under managerial accounting, as opposed to financial or tax accounting.

Examples of Cost Centers

Cost centers include a company's accounting department, the information technology (IT) department, and maintenance staff. Manufacturing entities typically have a cost center for quality control. The customer service center of an entity only generates costs such as salaries and telephone expenses, and is therefore a cost center.

Cost centers do not need to be as large as departments. In fact, a department may have multiple cost centers within it. A cost center may be any defined group in which management finds benefit in segregating the cost of the group. For example, a cost center may include all expenses related to a specific quality improvement project, grant award, or job position. A downside to having this fine level of detail is the heavy requirements of information tracking that potentially outweigh the benefits of the knowledge obtained.

College Policy Number/Title:

• 62.07 Management of College Funds

Cost centers are designed to group expenses for the budget of an operational department of the college or a specific college activity.  Within a department, there may be multiple cost centers for a manager who handles multiple types of services to assist in tracking and monitoring significant costs.  For example, the human resources department may have one cost center for the operational expenses of the office and an additional cost center to track and monitor expenses related to recruitment.

Cost center numbers are determined using guidance from The National Center for Higher Education Management Systems, which identifies functions and where those functions are nationally accounted for in financial reports.  The major functions within the college are instruction (1), public service (3), academic support services (4), student support (5), instructional support (6), plant operations and maintenance (7), and scholarship and fellowships (8).  There are also several funds within the college: operating fund (10), continuing education (11), miscellaneous programs (13), restricted (20), agency (40), auxiliary (60), and plant funds (70, 72).

Responsibilities

Cost center managers are fiscally responsible for the transactions charged to the center. Managers are responsible for developing the annual cost center budget of revenues and expenses for the upcoming year in conjunction with the president or their area vice president. The president or area vice presidents oversee their budgets and those of their managers. Additionally, when acting as a cost center manager, the president or area vice presidents are subject to the same responsibilities as cost center managers.

Cost center managers are responsible for properly coding revenue and expenses on accounting documents as detailed in the chart of accounts. They must abide by all procurement procedures. They are required to monitor and review the monthly financial reports that detail expenses and revenues to verify the accuracy of the data contained in the reports. Discrepancies are to be brought to the attention of the finance office, promptly, to assist in proper accounting of revenues and expenses by functional area.

Throughout the year, managers are responsible for the operations of their departments using the fiscal allocations within their cost centers. They are required to follow written policies and procedures of the college and exercise fiscal responsibility when spending college funds. Expenses should be necessary, reasonable, fully documented, and coded to the appropriated expense category within the managers’ budgets.

If a cost center manager will be away from campus, signature authority may be delegated to another individual in the area. If this occurs, notification must be given to the finance office. Delegation of signature authority does not relieve the cost center manager of the ultimate responsibility for the cost center. If over expenditures of a cost center are made during this period, the cost center manager will be held accountable.

If cost center managers feel that funds in their budget are not sufficient to carry out the operations of the area, they need to address the issue with the president or their area vice president before any over expenditure is made. If during the course of the year the cost center manager exceeds budget, either the manager's signature authority limit will be reduced, or the president or area vice president will be required to sign for all purchases.

When cost center managers are requested to implement new projects for which they will need additional funds, they must obtain a budget transfer into the appropriate budget before the expenditure is made. If this transfer does not occur, the cost center managers will be expected to cover the funds out of their budget.

Areas that are required to produce revenue to cover expenses must monitor cost center expenses closely. If during the course of the year actual revenues are not adequate for the area to break even, the cost center manager will be expected to reduce expenditures to ensure that a deficit will not be incurred in the area.

The president or area vice presidents of the area will review circumstances where cost center managers overspend their budgets. In these cases, cost center managers may be subject to a disciplinary action such as being ineligible for merit increases or being subject to a conditional contract.

All new cost center administrators are required to contact the finance office within one month of their appointment to receive individualized training on purchasing procedures and budget management.

The Finance Office

The finance office oversees and follows up on budget issues as they affect the financial status of the college as a whole. The office also monitors college expenditures for appropriateness and reasonableness, and conducts formal financial training sessions for cost center managers through professional development.

Budget Transfers

Within Cost Center Object Codes - Budget transfers within the cost center can be done throughout the year as reallocations become necessary due to unanticipated situations or changes in operations.

Between Cost Centers within the Same Functional Code - Transfers between cost centers within the same functions can be done with the authority of the manager of the cost centers or the president or area vice president. Justifications for the changes are required, and the director of finance or designee must properly approve the transfer of funds before the expenditure is made.

Between Cost Centers not in the Same Functional Code - Budget transfers between functions are not allowed because of functional expenditure limits set by law.

Effective Date: 09/10/21

President's Office Use:  VPAF

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