A cost center is an organizational unit that represents the location where costs are incurred. Typical cost centers include, for example, a company's accounting department, the information technology (IT) department, and marketing.
What you might be familiar with as the department of a company may be split into multiple cost centers in the system according to the operational and reporting requirements. Manufacturing entities such as the Bike Company typically have a cost center for quality control. There might be a single quality control department with multiple quality control cost centers in the system for each manufacturing plant. However, each cost center is assigned a single person responsible, typically the cost center manager.
Cost centers allow you to control costs and improve product and service valuations:
- You can analyze where costs are incurred within the organization.
- You can track the efficiency of the cost centers by comparing actual with planned costs.
- You can use different methods to assign activities and costs to the products, services, and market segments of your company.
A distinction is generally made between two basic types of cost centers: