Definition
A cost center is a department, branch, team or other unit to which expenses are assigned so management can see what each part of the business costs. It is tagged on journal entry lines rather than built into account codes, so the same expense accounts can be reported per cost center without multiplying the chart of accounts.
How it works
Typical cost centers are administration, sales, warehouse, production lines and branches. Each manager receives a report of the costs under their control, compared with budget, which is the basis of responsibility accounting.
A cost center is responsible for costs only. A profit center is responsible for revenue and costs, and an investment center also for the assets it uses. The same tagging mechanism supports all three; the management accounting guide explains segment reports in contribution format.
Keep the list aligned with the organization chart and change it at fiscal year boundaries. Shared costs such as rent can be allocated to cost centers at month end with an allocation entry.
Example: salaries split by cost center
A 40,000 payroll is posted to one salaries account with three cost center tags.
| Account | Cost center | Debit | Credit |
|---|---|---|---|
| Salaries expense | Administration | 12,000 | |
| Salaries expense | Sales | 18,000 | |
| Salaries expense | Warehouse | 10,000 | |
| Salaries payable | 40,000 |