What is Cost Center?

As a project manager, their job is to make sure employees are organized and understand timelines, goals, and challenges included in a specific project or campaign. A recruitment office helps you find the best people possible to work for your business. This department doesn’t directly generate sales, but it does hire the people who will nurture and engage customers. The stronger this department is, the better your marketing and sales teams will be. Most cost centers will have a manager in charge of tracking and reporting expenses. If the cost center is just an individual role, the employee may manage the expenses themself or it may be managed by their direct supervisor — depending on the role.

  • For instance, a company may sell products or services that were developed in its research and development cost center.
  • An electricity production company measures its cost per kilowatt-hour(kwh).
  • You need cost centers to take ownership of this workload so your marketing and sales teams have a clear path for engaging and prospecting customers.

It defined a cost center a location, person, or item of equipment (or a group of these) for which costs may be ascertained and used for the purposes of cost control. In cost accounting, costs are understood in terms of cost centers and cost units. Customer service teams are one of the most common examples of cost centers because it’s their primary responsibility to ensure customer delight.

How are costs allocated to Cost Centers?

The cost centers do not involve themselves in the investment or revenue decisions of an organization. The management can use the data provided by cost centers to improve operational efficiency and maximize profits. A cost center manager is only responsible for keeping costs in line with the budget and does not bear any responsibility regarding revenue or investment decisions. Internal management utilizes cost center data to improve operational efficiency and maximize profit. Organizations use cost centers to measure and track the performance of individual departments or groups.

Profit centers are crucial to determining which units are the most and the least profitable within an organization. They function by differentiating between certain revenue-generating activities. This facilitates a more accurate analysis and cross-comparison among divisions.

If payments aren’t properly credited to a customer’s account, there could be serious repercussions. Cost center activities are always included on your company’s balance sheet. While a cost center contributes no revenue to a balance sheet, it has both assets and liabilities.

  • After all, you don’t want to just spend money for the sake of spending it.
  • Cost centers may be devised to specialize in their one particular area.
  • Production cost centers are responsible for creating or manufacturing products.

After all, you don’t want to just spend money for the sake of spending it. You should want to maximize the value of your cost centers to ensure they’re providing the most return for what you’re spending on them. Expense segmentation into cost centers allows for greater control and analysis of total costs. Accounting for resources at a finer level such as a cost center allows for more accurate budgets, forecasts, and calculations based on future changes. External users of financial statements, including regulators, taxation authorities, investors, and creditors, have little use for cost center data.

Impersonal/Machinery Cost Center

Therefore, external financial statements are generally prepared with line items displayed as an aggregate of all cost centers. For this reason, cost-center accounting falls under managerial accounting instead of financial or tax accounting. These debits and credits are the cost units for the above-mentioned businesses and include parameters of physical measurement. In AskCody we provide organizations with the possibility to track expenses when catering or additional services are ordered for meetings.

For this reason, instead of having to juggle multiple competing priorities that detract resources from certain areas, cost centers can focus on what they do best. This means service departments that interact with customers can prioritize the service they deliver and not need to worry about the financial implications of needing to generate a profit. By showcasing operational excellence, the cost centers manage to keep a check on the costs incurred by them and stick to the budgetary restrictions. Overall, cost centers help organizations keep track of their spending and make informed decisions about where to allocate resources. The cost center is a key financial metric that is used to measure and manage the costs of a business.

What is a service cost center?

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. Cost units are always selected carefully based on the nature of business operations. A cost unit may be expressed in terms of number, length, area, weight, volume, time, or value.

The purpose of a cost center is to add value to the organization by incurring costs in order to achieve objectives. Cost centers can be found in all types of organizations, from manufacturing companies to service-based businesses. When managed effectively, cost centers can help organizations control expenses and improve efficiency.

How confident are you in your long term financial plan?

Wafeq is state-of-the-art accounting software designed to streamline financial management. Its adaptability and features make it suitable for handling complex cost-center management tasks. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. If costs are accumulated for a person, machine, or department, then this entity will be treated as a cost center.

This approach can help businesses keep costs under control but may also limit creativity and innovation if departments are afraid to spend money on new initiatives. Because the costs incurred by cost centers are internal and used to make management decisions, cost centers use managerial accounting to track data. Usually, when layoffs occur, they begin in the cost centers, as these positions are not revenue generators. Cost centers provide administrative and other support to revenue-generating activities. Cost centers enable a precise understanding of where costs are incurred within an organization.


A cost centre is a department or function within a business for which costs can be allocated. The main purpose of cost centres is to help managers control and monitor expenditure. The main difference between the two is that a cost center is only responsible for its costs, while a profit center is responsible for both its revenues and costs. Another difference is that cost centers tend to be organizationally simple, while profit centers are more likely to have a complex structure. Both concepts are used in a business where senior management wants to drive responsibility down into the organization.

Your human resources department is responsible for making sure employees are happy and answers any questions or concerns related to your team’s professional careers. This keeps employees motivated and helps you retain valuable talent that generates revenue for your business. In business, cost centers are like the offensive line for a football team. They don’t usually make the highlight reel and their work isn’t always as flashy as their sales and marketing teammates — or in this comparison, your wide receivers and running backs. Companies can opt to segment out cost centers however they choose, as the end goal of a cost center is to isolate information for better internal data collecting and reporting.

By contrast, the “process cost center is a cost center which consists of a continuous sequence of operations.” According to the Institute of Cost and Management Accountants, the “operation cost center is a center which consists of those machines and/or persons which carry out the same operations.” For more phrases to add to your customer service vocabulary, check out these customer service buzzwords.

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