costcentre

A cost centre is a unit within an organization where costs are incurred and accumulated for the purposes of planning, budgeting, and control. Typically a cost centre corresponds to a department, function, or activity that does not directly generate revenue but consumes resources such as labor, materials, and services. The main goal is to enable responsibility accounting: managers are accountable for controlling costs within their centre and for reporting variances against budgets or standards.

Costs attributed to a cost centre can be direct, meaning they can be traced to the centre, or indirect (overhead) and allocated from other centres using a cost allocation base such as hours worked, machine usage, or headcount. Performance is usually evaluated by cost variances, efficiency measures, or adherence to standard costs rather than profitability, since revenue is not the centre’s primary concern.

Cost centres are common in manufacturing and service organizations. Examples include production departments (machining, assembly), maintenance, quality control, IT support, and facilities management. In many accounting systems, cost centres are distinct from profit centres (which are judged on net profit) and investment centres (which are judged on return on assets).

In practice, cost centres support broader managerial objectives by providing visibility into expense drivers, enabling budgeting accuracy, and informing pricing, outsourcing, or process improvement decisions. Limitations include potential distortions from arbitrary allocation bases and the need for reliable data to avoid inaccurate cost attribution. In modern systems, cost centres may be integrated with activity-based costing and other costing methodologies to improve cost transparency.