Cost Center Definition - Investopedia

A cost center is a department or function within an organization that does not directly add to profit but still costs the organization money to operate. CorporateFinance&Accounting Accounting WhatIsaCostCenter? Acostcenterisadepartmentorfunctionwithinanorganizationthatdoesnotdirectlyaddtoprofitbutstillcoststheorganizationmoneytooperate.Costcentersonlycontributetoacompany'sprofitabilityindirectly,unlikeaprofitcenter,whichcontributestoprofitabilitydirectlythroughitsactions.Managersofcostcenters,suchashumanresourcesandaccountingdepartmentsareresponsibleforkeepingtheircostsinlineorbelowbudget. KeyTakeaways Acostcenterisafunctionwithinanorganizationthatdoesnotdirectlyaddtoprofitbutstillcostsmoneytooperate,suchastheaccounting,HR,orITdepartments. Themainuseofacostcenteristotrackactualexpensesforcomparisontobudget.Acostcenterindirectlycontributestoacompany’sprofitviaoperationalexcellence,customerservice,andenhancedproductvalue.Themanagerforacostcenterisonlyresponsibleforkeepingcostsinlinewithbudgetanddoesnotbearanyresponsibilityregardingrevenueorinvestmentdecisions. HowaCostCenterWorks Acostcenterindirectlycontributestoacompany’sprofitthroughoperationalefficiency,customerservice,orincreasingproductvalue.Costcentershelpmanagementutilizeresourcesinsmarterwaysbyhavingagreaterunderstandingofhowtheyarebeingused.Althoughcostcenterscontributetorevenueindirectly,itisimpossibletodiscerntheactualrevenuegenerated.Anyassociatedbenefitsorrevenue-producingactivitiesofthesedepartmentsaredisregardedforinternalmanagementpurposes. Themainfunctionofacostcenteristotrackexpenses.Themanagerofacostcenterisonlyresponsibleforkeepingcostsinlinewithbudgetanddoesnotbearanyresponsibilityregardingrevenueorinvestmentdecisions.Expensesegmentationintocostcentersallowsforgreatercontrolandanalysisoftotalcosts.Accountingforresourcesatafinerlevelsuchasacostcenterallowsformoreaccuratebudgets,forecasts,andcalculationsbasedonfuturechanges. Important Costcentersaren’talwaysentiredepartments;itcaninvolveanyfunctionorbusinessunitthatneedstohaveitsexpensestrackedseparately. Costcentersprovidemetricsmorerelevanttointernalreporting.Internalmanagementutilizescostcenterdatatoimproveoperationalefficiencyandmaximizeprofit.Externalusersoffinancialstatements,includingregulators,taxationauthorities,investors,andcreditors,havelittleuseforcostcenterdata.Therefore,externalfinancialstatementsaregenerallypreparedwithlineitemsdisplayedasanaggregateofallcostcenters.Forthisreason,costcenteraccountingfallsundermanagerialaccounting,asopposedtofinancialortaxaccounting. ExamplesofCostCenters Costcentersincludeacompany'saccountingdepartment,theinformationtechnology(IT)department,andmaintenancestaff.Manufacturingentitiestypicallyhaveacostcenterforqualitycontrol.Thecustomerservicecenterofanentityonlygeneratescostssuchassalariesandtelephoneexpenses,andisthereforeacostcenter. Costcentersdonotneedtobeaslargeasdepartments.Infact,adepartmentmayhavemultiplecostcenterswithinit.Acostcentermaybeanydefinedgroupinwhichmanagementfindsbenefitinsegregatingthecostofthegroup.Forexample,acostcentermayincludeallexpensesrelatedtoaspecificqualityimprovementproject,grantaward,orjobposition.Adownsidetohavingthisfinelevelofdetailistheheavyrequirementsofinformationtrackingthatpotentiallyoutweighthebenefitsoftheknowledgeobtained. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more UnderstandingProfitCenters Aprofitcenterisabranchordivisionofacompanythatdirectlyaddstothecorporation'sbottomlineprofitability.Assuch,itistreatedasaseparatebusinesswithrevenuesaccountedforonastandalonebasisandbalancesheet. more AccountingDefinition Accountingistheprocessofrecording,summarizing,analyzing,andreportingfinancialtransactionsofabusinesstooversightagencies,regulators,andtheIRS. more IntersegmentSales Intersegmentsalesarethetransferorexchangeofgoodsformonetarycompensationfromonedivisionofacompanytoanotherdivision. more WhatIsIncludedinSelling,General,andAdministrativeExpenses(SG&A)? Theselling,general,andadministrativeexpenses(SG&A)categoryincludesalloftheoverheadcostsofdoingbusiness. more Zero-BasedBudgeting(ZBB) Zero-basedbudgeting(ZBB)isamethodofbudgetinginwhichallexpensesmustbejustifiedforeachnewperiod. more PartnerLinks RelatedArticles Accounting AnalyzeCashFlowtheEasyWay Accounting Whenismanagerialaccountingappropriate? Accounting WhatIsCostAccounting? Accounting IntroductiontoAccountingInformationSystems–AIS CPA ExaminingACareerAsAnAuditor HowToStartABusiness BusinessDevelopment:TheBasics