A cost centre is an organisational unit or function that incurs costs but does not directly generate revenue. Cost centres are tracked separately in the accounting system for budgeting, cost control, and performance evaluation purposes. Common examples include HR, finance, IT, and legal departments.
In Depth
Cost centres are the fundamental building blocks of cost management in FP&A. By assigning costs to specific organisational units, finance teams create accountability and enable meaningful cost analysis and benchmarking.
Cost centres typically correspond to departments or functions: HR, finance, IT, legal, facilities, and administration. These teams are essential to the business but do not directly generate revenue. Their performance is measured by cost efficiency and service quality rather than profitability.
FP&A teams use cost centres for several purposes: departmental budgeting (each cost centre receives a budget), variance analysis (tracking actual vs budgeted costs by cost centre), cost allocation (distributing shared costs to revenue-generating units), benchmarking (comparing cost centre spending against peers or industry norms), and management reporting (providing department heads with visibility into their spending).
Cost centre structures should balance granularity with practicality. Too few cost centres means costs are lumped together and accountability is unclear. Too many creates administrative burden without proportionate benefit. A mid-sized UK company might have 15-30 cost centres.
For UK businesses, the chart of accounts typically includes cost centre codes that enable costs to be tagged to the appropriate team or function. This coding flows through from purchase orders and invoices through the general ledger to management reports.
Real-World Example
A UK technology company defines 12 cost centres: Engineering, Product, Sales, Marketing, Customer Success, People Operations, Finance, Legal, IT Infrastructure, Office & Facilities, Executive, and General. Each cost centre has a budget holder, a monthly variance review, and quarterly efficiency benchmarking against industry data. The FP&A team reports that the IT cost centre is 15% above the SaaS industry benchmark, prompting a vendor contract review.
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