What is a cost center?

Accounting for resources at a finer level such as a cost center allows for more accurate budgets, forecasts, and calculations based on future changes. At the retailer Walmart, different departments selling different products could be divided into profit centers for analysis. For example, clothing could be considered one profit center while home goods could be a second profit center. Your finance and accounting staff may also pinpoint new areas for your business to explore or determine what products and services are least and most profitable. There are many other common cost centers that exist in different businesses. For example the advertising and purchasing departments of a manufacturer are considered costs centers.

  • While your goal should always be to stay within budget, that shouldn’t be the sole purpose of your cost center.
  • Your contact center should be a modern, omnichannel engagement center that both agents and customers love.
  • The managers or executives in charge of profit centers have decision-making authority related to product pricing and operating expenses.
  • In most larger businesses, cost centers are a necessity, providing added value to a business.
  • The management focus in a cost center is usually on keeping expenditures down to a minimum level, possibly by using outsourcing, automation, or capping pay levels.

The purpose of a cost center is to track expenses so that managers can identify areas where costs can be reduced. Cost centers are often categorized by type of expense, such as marketing, research and development, or human resources. Managers typically review cost center reports on a regular basis to look for ways to improve efficiency and reduce expenses. In business, a cost center is a department or function within an organization that incurs costs. The term generally includes all indirect costs incurred by the organization, such as overhead and general and administrative expenses.

Trends That Will Shape Customer Service in 2024 and Beyond

While none of these tasks generates revenue, they are all essential to the health and well-being of Debra’s business. If bills aren’t paid on time, Debra’s credit rating could drop, affecting her ability to purchase goods for resellers. If payments aren’t properly credited to a customer’s account, there could be serious repercussions. Nurture and grow your business with customer relationship management software.

Support cost centers will have costs related to repairs, replacement parts, and fuel. Cost centers must be mindful of organization expenses, while still providing the necessary support services. A cost center, such as a production or profit center, has a budget that needs to be managed. Yes, a department or organizational unit can be both a cost center and a profit center. A profit center is responsible for generating revenue while a cost center is responsible for generating costs.

Depending on their activities, departments may generate both revenue and costs. A billing team doesn’t directly generate revenue for your business, but it’s still needed for your company to function properly. Without it, customers wouldn’t know where to submit payments and your business wouldn’t have a formal way of collecting them. Some examples of a cost center include the accounting department and the legal department.

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. 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.

The managers or executives in charge of profit centers have decision-making authority related to product pricing and operating expenses. Every large company has an accounting and tax department that employs people who do nothing but record company activities and find ways to increase efficiencies and lower taxes. Just because the accounting and tax departments are cost centers doesn’t mean that they aren’t valuable to the organization as a whole. If the accounting department can save the company money by lowering its taxable income, it will indirectly contribute to the companies overall profitability. Cost centers come in handy here because adding their expenses together makes it easy to calculate total costs for your business.

The stronger this department is, the better your marketing and sales teams will be. 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. TallyPrime enables you to compare incomes and expenses incurred in a particular cost centre or profit centre to the others.

Great! The Financial Professional Will Get Back To You Soon.

A service cost center involves providing services to the production department. For example, payroll processing department, powerhouse, service centers, plant maintenance centers, etc. For example, they may give each department a budget for the year and require managers to stay within that budget.

The management focus in a cost center is usually on keeping expenditures down to a minimum level, possibly by using outsourcing, automation, or capping pay levels. The main exception is when a cost center indirectly contributes to profitability (such as R&D), in which case a certain minimum expenditure level will be needed to support sales. When it comes to great customer service, your contact center plays an important role. We found that 94% of customers say a positive customer service experience makes them more likely to make a purchase again. Yet, only 13% of customers say they can get their issues solved with little effort. Contact center automation can help you deliver personalized, efficient, and complete service — all while reducing costs for your business.

Operational Cost Center

Wafeq, as a comprehensive accounting solution, stands out in supporting cost center management with ease and efficiency. Its real-time tracking, flexibility, and robust features can be a game-changer for any business, big or small. 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. Cost centres in an organisation are nothing but different departments or verticals that handle processes, imperative to run an organisation, irrespective of revenue generation.


They create the project’s blueprints so the rest of the team can execute the plan. 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.

For example, if you have an HR department or even a single HR employee, they would be considered a cost center. Cost centers do not generate revenue but incur expenses, which directly affects both cash flow and your income statement. An impersonal cost center refers to a cost center that consists of a location, item of equipment, or a group of these (e.g., machines, departments, and vehicles). Wafeq’s accounting solution predetermined overhead rate provides the necessary support for organizing and analyzing cost centers, minimizing potential drawbacks, and maximizing the value of this financial strategy. While cost centers offer clarity and control, they may also introduce complexity, especially if not managed properly. A poorly implemented cost center can lead to misallocation of resources, skewed profitability analysis, and additional administrative burdens.

Cost centers are vital in tracking expenses and allowing managers to optimize operations within that area, using tools like Wafeq to ensure financial control and alignment with company objectives. Organizations use cost centers to measure and track the performance of individual departments or groups. This information can be used to make decisions about where to allocate resources and how to improve efficiency.

IT Departments

A cost center is a collection of activities that management wishes to track as a group to better understand the expenses necessary to support an organization. Unlike the investment centers of the business, the cost centers do not earn money, but they are critical parts of helping the company run and often can not simply be eliminated. With greater insights into the financial aspects of different areas of their company, upper management can use cost center data to make better decisions.

Project Cost Center

This will help you to identify any areas where costs are spiralling out of control. If you see any areas of concern, you can take action to correct the problem. Knowing which type of cost center you are dealing with can help you better understand where the money is going and how it is being used. 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.” If costs are accumulated for a person, machine, or department, then this entity will be treated as a cost center.

Dana DiRenzo, MD