What Are Cost Centers and Why Do Companies Need Them?
As a business grows, it becomes important to track expenses in different areas of the company. These areas can be departments, office locations, branches, or any other part of the business where costs need to be monitored. Companies set up cost centers to manage and control these expenses effectively.
- business expenses are assigned to specific cost centers
- each cost center has someone responsible for its costs
- resources like property, equipment, buildings, or employees are linked to a cost center
Why are Cost Centers Important for Business?
Cost centers provide support to businesses in various ways. They can benefit your business in many ways. Let’s look at a few of them.
- Cost centers are an important function in every business. Even a small company can benefit from a cost center.
- A cost center can be a single person, such as an accountant responsible for entering transactions into your accounting software, or it can be an entire human resources department. Cost centers provide administrative and other support to revenue-generating activities.
- If you have, for example, a human resources department or even just one HR employee, they would be considered a cost center. Cost centers do not generate revenue but incur expenses that directly affect both cash flow and your profit and loss statement.
- They help allocate resources
- They provide useful information alongside the organizational structure