What is a cost center?

A cost center is a specific department, team, or individual within an organization that is responsible for incurring costs but does not generate revenue directly. The purpose of a cost center is to track and monitor the expenses associated with the activities of a particular segment of the organization.

Cost centers are typically assigned a budget or target for their expenses, and their performance is evaluated based on how well they stay within that budget. This helps management to control costs and identify areas where efficiencies can be improved.

Examples of cost centers include manufacturing departments, research and development teams, administrative offices, and support functions like IT or human resources. Cost centers are often used in larger organizations to break down and analyze the various expenses incurred by different parts of the company.

Cost centers are important for financial planning and decision-making within an organization as they provide insight into where resources are being allocated and where cost-saving measures can be implemented.