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A cost center is a department or function within an organization that incurs costs but does not directly generate revenue or profit. Its primary role is to support the overall operations of the business. Examples of cost centers include human resources, accounting, customer service, and IT departments. The costs associated with these centers are tracked and managed, but they are not directly attributed to specific products or services sold.

The purpose of identifying cost centers is for effective cost control and management. By categorizing expenses into specific departments or functions, organizations can better understand where their money is being spent. This allows for more accurate budgeting, performance evaluation of managers responsible for those centers, and identification of areas where cost reductions might be possible. Managers of cost centers are typically evaluated on their ability to manage expenses within their allocated budgets.

The concept of cost centers is a fundamental element of managerial accounting. It helps in allocating overhead costs to revenue-generating units or products, aiding in pricing decisions and profitability analysis. While cost centers do not generate revenue themselves, their efficient operation is crucial for the success of the entire organization. Their performance is measured by how well they control their expenses and contribute to the smooth functioning of the business.