A cost center is a part of an organization where costs are incurred but typically no direct revenue is generated. It is used to track the expenses related to specific operations or functions within the company, facilitating more accurate financial reporting and analysis. Common examples of cost centers include departments such as human resources, accounting, or IT.

For instance, a company's IT department can be treated as a cost center by allocating and tracking costs like salaries, utility expenses, and equipment purchases. Even if the IT department does not directly generate revenue, its operational costs are essential to support the company’s broader goals.

By delineating cost centers, companies gain insights into their expenditure patterns and can implement strategies to improve efficiency and cost control. These practices enhance financial accountability, allowing managers to focus on optimizing the resources allocated to their cost centers while maintaining operational objectives.