Service center definition
/What is a Service Center?
A service center is a department that provides services to other departments within a business. The costs of these departments may be charged to the using departments under the terms of an annual service agreement, so that all managers concerned can budget for the charges that will be billed. If the cost of a service center appears excessive to a using department, the manager of the using department may have the option of acquiring the service from a third party.
Example of a Service Center
Examples of service centers are the janitorial department, maintenance department, and information technology department, since all of them provide services to other departments within an organization. Conversely, the sales department would not be considered a service center, since it is entirely outward-focused.
Accounting for a Service Center
There are several ways to account for a service center. Here are the options:
Specific billings. A service center could have an internal fee schedule, which it uses to charge other departments for the services provided. This means that the service center is operated as a profit center.
Cost center. A service center could be operated as a cost center, where its manager is held accountable for keeping costs as low as possible. There are no billings to other departments.
Allocated costs. The costs incurred by a service center are allocated to all using departments at the end of each reporting period, using either a standard or actual overhead rate.