A cost center is a business unit that is only responsible for the costs that it incurs. The manager of a cost center is not responsible for revenue generation or asset usage. The performance of a cost center is usually evaluated through the comparison of budgeted to actual costs. The costs incurred by a cost center may be aggregated into a cost pool and allocated to other business units, if the cost center performs services for the other business units. Examples of cost centers are as follows:
Human resources department
Research & development
A cost center can be defined at a smaller level than a department. It could involve a particular job position, machine, or assembly line. However, this more detailed view of cost centers requires more detailed information tracking, and so is not commonly used.
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.