A cost center is a department in an organization that doesn’t bring in any (direct) revenue for the firm, but does incur costs. The unit helps enhance the firm’s revenue-earning potential or supports revenue-generating departments. For example, the R&D (research and development) team doesn’t directly contribute to revenue, but lays the foundation for innovative and enhanced products that’ll ultimately bring in sales and profits. Similarly, customer service is also a cost center. Needless to say, both R&D and customer service sections incur costs on staff, operations, infrastructure, etc. Other examples of cost centers are IT departments, quality testing teams, and human resource and accounting departments.
A cost center is usually a small section of an organization, which means there could be multiple cost centers within a firm. In fact, cost centers could also be a particular process or equipment within a department such as an assembly line or specialized machine. However, most organizations do not resort to such macro detailing of costs as information-tracking would then become a lot more laborious, often outweighing the benefits to the data procured.
Measuring and documenting costs incurred by specific cost centers through expenditure-tracking is not difficult. However, if cost centers weren’t established and were blended into regular operations, it would be tough to get to the root of the expenses incurred. For example, if a firm has no dedicated customer support number, it would then find it difficult to differentiate telephone costs incurred on handling customer queries from marketing phone calls. Such accounting helps with establishing budgets for and monitoring spends of new projects, controlling expenses, and evaluating performance of a particular cost center.