Operating segments – Cost centers

IFRS 8 defines an operating segment as a ‘component of an entity that engages in business activities from which it may earn revenues and incur expenses’. This recognises that not all business activities earn revenues.

Cost centers as a separate segment

Manufacturing entities that are managed by reference to operating cost centres, may not record cost center revenues because the entity’s total customer revenues are not allocated to each cost center. Operating segments – Cost centers

Care should be exercised when determining whether an internally reported activity constitutes an operating segment (for example – A head office function that undertakes business activities (for example, a treasury operation that earns interest income and incurs expenses)) may be an operating segment as long as its revenues earned are more than incidental to the activities of the entity, and discrete financial information is reviewed by the Chief Operating Decision Maker (CODM)).

As long as discrete financial information is prepared and reviewed by the CODM such components would be considered operating segments.

Cost centers are related to the company’s profit as they manage operational efficiency, customer service or increase the value of the product. Cost centers help managers to use resources in a more efficient way, based on an understanding of how they are used now.

Although the cost centers contribute to receiving income, it is impossible to determine how much revenue was generated by the these centers. Any activities of these units, related to gaining profit or generation of the income, are not taken into account when it comes to internal management purposes.

Expense recognition Operating segments – Cost centers

The main function of the cost centers is to track expenses. Operating segments – Cost centers

Employees, who spend funds within the cost centers, are responsible only for expenses and do not bear any responsibility concerning income or investment decisions. The allocation of expenses between cost centers allows you to control total costs better.

Thus, resource accounting takes place at a higher and more detailed level, for example, at the cost center level. And this allows to have more accurate forecasts and calculations based on future changes.

Leave a Reply

Your email address will not be published. Required fields are marked *