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Cost Centers - Introduction to Cost Accounting, Cost Accounting Video Lecture | Cost Accounting - B Com
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106 videos|173 docs|18 tests
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FAQs on Cost Centers - Introduction to Cost Accounting, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What is a cost center in cost accounting? |  |
A cost center in cost accounting refers to a specific department, unit, or area within a company where costs are incurred. It is a segment of a business that is responsible for incurring costs but does not generate any revenue directly. Cost centers are typically used to track and allocate expenses, allowing management to analyze and control costs within the organization.
| 2. How are cost centers different from profit centers? | |
Cost centers and profit centers are both used in cost accounting, but they have different purposes. A cost center focuses on tracking and controlling costs, while a profit center is responsible for generating revenue and ultimately profitability. Cost centers are typically support functions within an organization, such as administration or human resources, while profit centers are usually revenue-generating units, such as sales or production departments.
| 3. What are the benefits of using cost centers in cost accounting? | |
There are several benefits of using cost centers in cost accounting. Firstly, cost centers allow for better cost control and management as expenses can be tracked and allocated to specific areas. This helps in identifying areas of high costs or inefficiencies. Secondly, cost centers enable accurate cost allocation, which is important for pricing decisions and determining the profitability of different products or services. Lastly, cost centers facilitate performance evaluation by providing detailed cost information for each department or unit within the organization.
| 4. How are costs allocated to cost centers? | |
Costs can be allocated to cost centers using various methods. One common method is direct allocation, where costs incurred directly by a specific cost center are assigned to that center entirely. Indirect allocation is another method, where costs are allocated based on a predetermined allocation base, such as the number of employees or square footage. This method is used when costs cannot be directly traced to a specific cost center. Another method is step-down allocation, where costs are allocated first to primary cost centers and then distributed to secondary cost centers based on some allocation basis.
| 5. Can a cost center have a negative impact on profitability? | |
Yes, a cost center can have a negative impact on profitability if its costs exceed the revenue generated by other profit centers. This can happen when a cost center incurs high expenses without contributing significantly to the overall revenue of the organization. In such cases, management needs to analyze the cost center's operations and identify areas for cost reduction or improvement. The goal is to ensure that the benefits derived from the cost center's activities outweigh the costs incurred.
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