Cost is defined as necessary (socially and economically justified) consumption of material and outside services, expressed in purchasing prices and the necessary use of labor, expressed in terms of wages, being associated with a useful effect.
Cost center concept is extremely important for modern companies by providing managers with a proper definition of profitability and good planning and budgeting system. In cost center costs that are used when planning the budget are classified Criteria for the allocation of costs depend on the purposes for which the costs are calculated, analyzed, reported and communicated. By using this type of classification managers can more accurately allocate costs and revenues for individual departments within the company, which gives them an insight into the current state of company finances.
Types of costs
- Direct / Indirect
- Cost of completed goods / Production in progress
- Fixed / variable / semi-variable
- Used in decision making / monitoring
- Foregone / Not foregone
- Controlled (dependent) / uncontrollable (independent)
- By type: depreciation, materials, etc.
- Investment activities, operational activities
The process of cost control
Cost control is a process that is part of the economic control, designed to regulate economic values based on reference values. This process consists of the following elements:
- Determine the reference value. Manager can specify it on the basis of knowledge about manufacturing processes factors (cost of materials, labor and overheads), so called. normative or standard cost. This value shall be determined in order to stabilize the cost of the enterprise to be as close as possible to the desired cost level.
- Measurement of the cost level. By means of company's accounting system, which has a clearly defined characteristics. The detail of this system depends on the managers objectives and the extent to which it could handle accounting information on costs. This system gives insight into the cost of products, services, orders etc.
- Compare the results of measurements with the reference value. It is the main process of cost control. Occurs only when managers have set the reference value. Then they can analyze results of measurement to obtain the outline of the situation in the enterprise.
- Determine deviations and its causes. Managers should focus on large deviations (ignoring less important), and determines which of the factors that caused these deviations. This analysis could be carried out by most accountants.
- Corrective action. It is done after causes of deviations are determined. Managers decide which modification should be introduced, and which will be most effective for company's finances.
- DeRiso, B., Cantees, K., & Watkins, W. D. (1995). The operating rooms: cost center management in a managed care environment. International anesthesiology clinics, 33(4), 133-150.