A cost center is a department or business unit within an organization that incurs costs but does not directly generate revenue or profits. Cost centers are typically used in management accounting to track and control expenses and to allocate costs to different products or services.
Examples of cost centers might include a human resources department, an IT department, or a research and development department. These departments may incur costs such as salaries, rent, utilities, and supplies, but they do not directly generate revenue for the organization.
Cost centers are often used in conjunction with profit centers, which are departments or business units that generate revenue and profits for the organization. By tracking costs separately in each cost center and revenue and profits separately in each profit center, organizations can better understand the profitability of different products or services and make more informed decisions about resource allocation and cost control.