Cost Center
A cost center is a business unit or department that incurs expenses but doesn't directly generate revenue. Cost centers support revenue-producing activities — think HR, IT, accounting, facilities, or R&D. They're evaluated on their ability to control costs and provide value to the organization, not
Cost Center Definition
A cost center is a business unit or department that incurs expenses but doesn't directly generate revenue. Cost centers support revenue-producing activities — think HR, IT, accounting, facilities, or R&D. They're evaluated on their ability to control costs and provide value to the organization, not on revenue generation.
Cost Center in Practice — Example
Your growing e-commerce company has several cost centers: the warehouse (receives, stores, and ships orders), the IT department (maintains systems and website), customer service (handles inquiries and returns), and accounting (manages books and payroll). Each incurs expenses — wages, equipment, utilities — but none directly sells products. Their costs get tracked separately to measure efficiency and allocate overhead to revenue-generating product lines.
Why Cost Center Matters for Your Books
Tracking cost centers helps you understand the true cost of running your business beyond direct production. You might discover that customer service costs 3% of revenue while industry average is 2% — signaling an opportunity for efficiency improvement or a strength in customer satisfaction.
Cost center tracking also enables accurate pricing. If you know your overhead costs by department and can allocate them to products or services, you can price to ensure all costs are covered — not just the obvious ones.
For growing businesses, cost center analysis reveals when support functions need additional investment. If the warehouse cost per shipment is rising as volume grows, it might signal the need for automation or additional staff.
How Cost Center Shows Up in QuickBooks
In QBO, create cost centers using class tracking or location tracking. Set up classes for each cost center (HR, IT, Facilities) and tag all related expenses. Run Profit and Loss by Class reports to see costs by center. For allocation, use journal entries to redistribute cost center expenses to revenue-producing departments based on usage, headcount, or other logical methods. This gives you a fuller picture of profitability.
Common Mistakes
FAQ
Q: What's the difference between a cost center and a profit center? A: Cost centers incur expenses but don't directly generate revenue (HR, IT, facilities). Profit centers both generate revenue and incur costs (specific product lines, regional offices, business units).
Q: Should small businesses track cost centers? A: Only if you have distinct support functions and want to understand their cost impact. For very small businesses, the added complexity often isn't worth it. As you grow and add departments, cost center tracking becomes more valuable.
Related Terms
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Related Terms
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