Cost Center
A defined segment of an organization—such as a department, team, or physical location—whose expenses are tracked separately so managers can measure and control the costs of running that activity, even though the unit itself does not directly generate revenue.
Key Facts
Alternate names: expense center, overhead center, responsibility center
Typical owners: department heads, plant managers, shared-services leaders, FP&A analysts
Examples: IT help desk, HR, facilities, legal, R&D lab, maintenance shop
Key data points: actual vs. budget spend, variance %, allocation basis, head-count, overhead absorption rate
Why It Matters
Expense visibility – Isolating costs by center lets finance pinpoint overruns early rather than burying them in corporate overhead.
Accountability – Managers own a slice of the P&L they can influence, reinforcing spend discipline without holding them to revenue targets they can’t control.
Better decision-making – Accurate cost attribution feeds product pricing, outsourcing analyses, and ROI calculations.
Real-World Examples
Hospital network
Each nursing ward is a cost center capturing wages, supplies, and equipment depreciation. Finance compares cost per occupied bed across wards to flag best practices and target training where spend is above benchmark.
Software company
Cloud infrastructure is tracked as its own cost center. Monthly AWS and Azure bills flow automatically into the GL segment, giving engineering leadership a clean view of unit economics (infrastructure cost per active user).
Diagram / Visual (optional)
A matrix showing Corporate Overhead broken into IT, HR, Facilities, and Finance cost centers, each rolling up to total operating expenses.
Related Terms
Profit Center
Responsibility Accounting
Overhead Allocation
Activity-Based Costing
Frequently Asked Questions
Q: How is a cost center different from a profit center?
A: A cost center focuses only on controlling expenses, while a profit center is responsible for both revenue and costs—and therefore for profit.
Q: What’s the best way to allocate shared services back to revenue-generating units?
A: Common bases include head-count, direct labor hours, square footage, or activity drivers (e.g., tickets resolved for IT).
Q: Can a cost center ever become a profit center?
A: Yes. If, for example, an internal print shop starts selling services to external customers, it may be reclassified as a profit center to reflect its revenue responsibility.
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