Cost centre
A department or unit whose costs are tracked separately. A business can see where money is spent and who is responsible for it.
In short
- Cost centres add a second dimension to the chart of accounts: what the cost is, and where it belongs.
- They typically map to departments, locations or teams with a budget owner.
- A cost centre is measured on spending, not on revenue or profit.
A cost centre is a part of the business that is responsible for costs but not directly for generating revenue. Marketing, human resources, IT and finance are common examples, as are individual stores, warehouses or regional offices.
How cost centres work
Every expense is recorded with two pieces of information: the account, which says what the cost is (software, travel, salaries), and the cost centre, which says where it belongs (marketing, the Toronto office, the product team). Reports can then show total software spend across the company, or everything the marketing team spent, from the same data.
Why businesses use them
- Accountability: each cost centre has an owner who approves its spending and answers for its budget.
- Budgeting: budgets are set and tracked per cost centre.
- Allocation: shared costs such as rent can be split across cost centres to see the full cost of each.
Cost centre versus profit centre
A profit centre is responsible for both revenue and costs, and is judged on profit: a product line or a sales region, for example. A cost centre is judged on controlling spending relative to its budget and the service it provides.
Getting the cost centre right at the moment an expense is coded is far easier than reclassifying costs at month end.
Worked example
One account, three cost centres
A company's $18,000 of software spend in May is recorded in account 6300, Software. Split by cost centre, it is $9,500 for Engineering, $5,300 for Marketing and $3,200 for Finance. The marketing director sees her team's $5,300 against a $4,500 budget and reviews its subscriptions.