Cost Center

Many parts of a business do not earn revenue directly. Examples include human resources, finance, IT, maintenance and many production departments. These are often treated as cost centers.

Cost center managers are evaluated mainly on how well they control spending, usually by comparing actual costs with budget and with the level of service or output they provide.

For example, the IT department might have an annual budget of 2,000,000. Its manager is judged on keeping costs within budget while maintaining the systems the business relies on.

Treating a department as a cost center can encourage cost discipline, but it may also lead managers to cut spending in ways that harm the wider business, such as reducing maintenance and causing breakdowns later. For this reason, cost targets are usually paired with service-level or quality measures. Some companies charge other departments for internal services, turning certain cost centers into units that recover their costs.