What is a cost centre?

If you type the above question into a Google search, you’ll get many answers. The one thing I found funny about the answers I looked at is they always mention costs – great – but some do not at all mention accountability.

So what is a cost centre? Well here is my definition. A cost centre is a unit, function, department or similar in an organisation for which:

1. Costs can be traced to
2. A manager is held accountable for those costs.

The second part of the definition is often forgotten, but it is probably the most important. The basic idea of responsibility accounting is that a manager is responsible for things like planning a budget or measuring performance against target. So in a cost centre, the manager is accountable for costs – but not revenue, profit or return on investment.