Definition
The term cost center is used to identify a business unit responsible for certain costs incurred by the company. A company's cost center performance is evaluated by comparing budgeted costs with actual costs. Companies commonly aggregate budgets into a cost pool and allocate them to cost centers depending on the costs actually incurred.
Example
A cost center is a sub-section or a small unit within an organization. Examples of cost centers that are commonly seen in companies are accounting, IT, human resources, and research & development.
Why it matters
A company's management periodically looks at various cost centers to ensure that the expenditures are kept under control by either outsourcing, automating, or other efficiency initiatives. One of the common exceptions to controlling costs for a cost center is a company's R&D. In such cases, companies set aside certain expenditure levels for unique cost centers.