Cost centers on the income statement

In a small company there is usually an admin team comprising of one accountant, assistant and manager, a sales team and perhaps a production and logistics team. While the last two are considerable in larger companies, it shows that within one company there may be numerous departments.

Although those departments vary depending on the business type and market sector, some of those are more or less described as cost centers and others profit centers. As the name suggests, cost centers are generating cost and profit centers generate revenue. Since they are within one company, profit centers take care of the revenue streams and cost centers are there to provide support for profit centers by making the products, organizing logistics, advertising, maintenance etc.

Normally you have on the income statement cost of goods sold, sales and operating expenses. They may be split within as between say admin and maintenance or something similar, however, when the departments are bigger or there are more departments, than you may find it useful to have something called cost centers implemented within the accounting.

There are two ways to do it and it depends both on your accounting software and your own personal choice of preference really. One way is to implement cost centers you apply to every entry. This enables you to filter expenses designated to this specific center. The other option is to create separate accounts for specific cost centers thus separating the expenses.

Either way you do it, is fine really. The aim is to have an overview of cost centers expenses and measure their performance. With these methods you can see their resource usage and measure it against some key performance indicators to assess their effectiveness.