A cost center is a department or function within a company that incurs costs but does not directly generate revenue. By defining a cost center, the expenses are tracked and analysed, which is the main purpose of a cost center. Each cost center has a manager who is responsible for keeping costs in line with the budget. With the Fidugius Accounting & Reporting Manual, costs are allocated to cost centers in the right way. No discussions or misinterpretations thanks to clear guidelines and instructions.

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The main objective of a cost center is to provide support to other departments in the company to ensure that they can operate efficiently and effectively. Cost centers allow for greater control and analysis of total costs, and companies can use them to isolate information for better internal data collection and reporting. They provide greater fiscal responsibility, help with accurate budgeting and forecasting, improve operational efficiency and maximise profits.

One of the key differences between a cost center and a profit center is that a profit center generates revenue, while a cost center does not. Profit centers are typically responsible for generating profits and are evaluated based on their profitability, while cost centers are evaluated based on their efficiency and effectiveness in managing costs.

Setting up a cost center

To set up a cost center, a company must first identify the areas of the business that incur costs but do not generate revenue. These may include functions such as administration, human resources, finance and IT. Once these areas have been identified, the company can allocate costs to each cost center based on their activities and resources used.

Cost centers are often assigned their own general ledger coding, which management and personnel can use to absorb and report costs. When budgets are prepared, cost centers are intentionally forecast to operate at a loss. Instead, management’s objective is to minimise the deficit of a cost center while still providing general support to profit centers.

A company should regularly review its activities and expenses to ensure that they are aligned with the company’s overall goals and objectives. This may involve identifying areas where costs can be reduced or where new efficiencies can be introduced. Regular monitoring and reporting of costs and activities can help to identify areas where improvements can be made.

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The main cost centers within a company can vary depending on the industry and the specific nature of the business, but some common examples include:

  • Production or operations: This includes the costs associated with manufacturing or producing goods, such as raw materials, labour, and machinery.
  • Sales and marketing: This includes the costs associated with advertising, promotions, and sales personnel.
  • Administration: This includes the costs associated with general management, accounting, human resources and legal services.
  • Research and development: This includes the costs associated with the development of new products, processes or technologies.
  • Information technology: This includes the costs associated with hardware, software and other technology-related expenses.
  • Facilities and maintenance: This includes the costs associated with the maintenance of buildings, equipment,and other physical assets.

It is important to note that some expenses may be shared across multiple cost centers, and the way in which expenses are allocated can vary depending on the company’s accounting practices

Management of cost centers

A manager responsible for a cost center regularly reviews the costs incurred during a period based on reports and kpi’s. In theory, there should be no surprises in the costs incurred on a cost center during a period. Expenses are approved upfront and with a purchase order the invoice is matched once it is received. However, to ensure that management is accurately informed of the costs incurred and only those incurred for his/her cost center, it is important to have clear definitions in place of what the cost center should comprise and what costs can be included. Also, clear guidelines for cost allocation contribute to a clear understanding within the company. With the Fidugius Accounting & Reporting Manual, the manager is assured that the right costs are charged and/or allocated to his/her cost center and that everyone is well informed about their definition.

The benefits of using our solution

The Fidugius Accounting & Reporting Manual has been developed to ensure that management is accurately informed of the costs incurred. It contains:

1. up-to-date information
2. easy access and navigation
3. relationships and interdependencies
4. interactive experience
5. the right level of detail
6. periodic updates to ensure continuity

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