Cost center

Definition

A cost center is a division or department within an organization that is responsible for controlling costs but does not directly generate revenue. Managers of cost centers are evaluated based on their ability to manage and control costs effectively.

5 Must Know Facts For Your Next Test

1. Cost centers focus solely on managing expenses without being accountable for revenue generation.
2. Performance in a cost center is measured using budget variance analysis, comparing actual costs to budgeted costs.
3. Common examples of cost centers include HR departments, IT services, and maintenance departments.
4. The main goal of a cost center manager is to minimize costs while maintaining the quality and efficiency of operations.
5. Cost centers play a crucial role in overall organizational profitability by ensuring operational costs are kept under control.

Review Questions

• What is the primary responsibility of a cost center?
• How is performance typically measured in a cost center?
• Can you name three common examples of cost centers within an organization?

Related terms

Profit Center:

A division or department responsible for generating its own revenue and profit.

Investment Center:

A unit within an organization that is responsible for its own revenues, expenses, and assets.

Responsibility Accounting:

An accounting system that collects and reports revenues and costs by individual responsibility centers.