Cost center is a designation for an organizational unit within a company that generates costs but does not generate revenues (directly), as opposed to profit center that generates costs as well as revenues. These concepts are used for the purposes of internal accounts of a company or controlling.
Cost center uses a variety of enterprise resources or consumes material, energy, or services. This requires some funds - costs that are allocated to the cost center.
What is a cost center good for in practice?
In order to monitor costs and to increase transparency and accountability for costs, and thus improve the company’s cost management, it is a good idea to allocate costs to particular organizational units, including cost centers. This way, total cost of the company is divided into smaller units. There is always one person (manager) responsible for the cost management of an organizational unit. The result is a better cost management of the entire company and better planning. The costs are part of the budget planning of a given organizational unit; its manager is responsible for the budget keeping.
Examples of cost centers
Typical examples of cost centers are organizational units charged with support processes in the company. Thus, they do not generate profit, but they help to keep the company running, or they contribute to making the company profitable in its main processes.
- IT department
- Quality Department
- Facility management
- Building/premises management
- HR department
- Finance Department