Cost Center

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Description of Cost Center. Explanation.

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Definition Cost Center. Description.


Cost Centers are responsible for producing an agreed level of output (quantity + quality). Their efficiency is measured and rewarded according to how fully it achieves that objective.


In a Cost Center, inputs or expenses are measured in monetary terms, but output is not. Managers of these units are typically evaluated by means of productivity measures that relate the quantities of inputs used to generate the required outputs. They are evaluated on the cost efficiency with which they use a mix of inputs (labor, materials, and outside services). Because these managers are not held responsible for selling the company's products or services, they are not judged on revenues or profits.


Typical examples of these organizational entities are Manufacturing departments and Shared Services departments.


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Compare with: Strategic Business Unit  |  Profit Center  |  Investment Center  |  Revenue Center  |  Expense Center  |  Performance Management  |  Activity Based Costing  |  Balanced Scorecard  |  CSFs and KPIs  |  Value Based Management  |  Transfer Pricing

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