What is Cost Centre? Definition, Need, Example and Classification

cost centre example

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In practice, cost centres are identified in accounting by a multi-digit number combination specific to each cost centre. This is added to each entry so that each expense is attributed to a cost centre. The project managers are responsible to plan a project they are also responsible to prepare its budget and tracking its progress.


Your business might hire one to maintain the exterior of your building, but their work doesn’t produce any direct revenue from customers. However, if you don’t hire a landscaper and the plants outside your building start to overgrow, this can directly impact sales. Customers may see an untrimmed lawn and tall weeds growing outside the building and think that your company either can’t afford to pay a landscaper or doesn’t value its brand appearance. Cost centers may not generate immediate revenue, but they do improve customer experience over time.

What is a real life example of a cost center?

A cost center is a collection of activities tracked by a company that do not generate any revenue. An example of a cost center is the accounting team within an organization. This center of activity is different from a profit center in which a profit center does generate both revenues and expenses.

Pectus connects directly to your accounting system (e.g. Datev), so you always have access to your latest data. You can also create reports, calculate KPIs and run analyses in no time, and share them with your colleagues. 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. Cost centers do not earn money, but they are critical parts in helping the company run and often can not simply be eliminated.

More Transparent Operational Shortfalls

It is the responsibility of the manager of the profit centre to generate revenue and incur costs in a manner to maximize profit. Regardless of the size of the company, cost accounting is one of the most important instruments of corporate management. With cost accounting manage your finances it is possible to determine exactly which areas of a company cause which costs. This is essential in order to manage a company strategically and to measure its success. Only if you know where which costs are incurred can you react accordingly and make sound decisions.

cost centre example

(b) An item of equipment e.g., a lathe, forklift, truck or delivery vehicle. Similarly, a Supermarket chain like Big Bazaar or Walmart can identify their highly profitable stores by making a comparison of the profit made by each centre. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

What is a Cost Center?

If a problem comes up, the service team is responsible for making sure the customer is happy and willing to return for another purchase. A program that you were originally able to fund may not be possible anymore due to rising costs. If you don’t have a way to track these expenses over time, you run the risk of spending money on a service or department that doesn’t provide equitable value. This will help you determine whether you’re achieving your goals and if the cost center is indirectly adding value to the customer experience.

  • They create the project’s blueprints so the rest of the team can execute the plan.
  • After costs have been ascertained, accumulated, classified, and recorded, they must be related to a convenient measure of the quantity of the product or service.
  • It is not easy to see the relationship between the cost-incurring inputs and any type of revenue-generating outputs.
  • Further, a large number of cost centres can be expensive for the firm and when the number of a cost centres is limited to a few only, then it may not serve its very purpose.
  • ‘Service cost centres’ are those which are ancillary to and render service to other production and service cost centres.

They as such do not add up to the profit but are important to complete the project. 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. Cost can be defined as the amount of money used by the company for the purpose of producing the product or providing the service to the customers. A cost centre in which a specific process or a continuous sequence of operations is carried out. This will give you a clear picture of how much money can be spent in each area of the cost centre.

3 Define cost, revenue, profit and investment centres and explain why managers of each must be evaluated differently.

Instead, management’s goal is to minimize the deficit of a cost center while still providing general support to profit centers. In cost accounting, costs are understood in terms of cost centers and cost units. The firm may face difficulty in measuring profit due to transfer prices, joint revenue and common cost.

  • By contrast, the “process cost center is a cost center which consists of a continuous sequence of operations.”
  • However, this more detailed view of cost centers requires more detailed information tracking, and so is not commonly used.
  • Cost can be defined as the amount of money used by the company for the purpose of producing the product or providing the service to the customers.
  • But there is not much they can do to directly impact the company’s revenues.
  • The managers of profit centres focus on both the production and marketing of the product.

In addition, make a distinction between cost centers and discretionary cost centers. The difference is with the relation between inputs and outputs in the production process. When there is a well-defined relation between inputs and outputs in the production process, the organizational subunit is a cost center. For example, a manufacturing process is a regular cost center because each unit of output requires a measurable input of raw materials and a measurable amount of direct labor time.

What are 5 examples of cost?

Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments.