What Are Cost Centers?

What Is a Cost Center?

A cost center is a named grouping of machines and equipment that share a common overhead — a specific set of costs that apply to that group but not to the rest of your workshop. By assigning machines to cost centers, you can allocate overhead more accurately to the products that actually use those machines.

Why It Matters

Without cost centers, overhead must be spread equally across all products, regardless of which equipment they use. This leads to cross-subsidisation: your hand-stitched leather goods effectively pay for the running costs of your laser room, even though they never use the laser.

With cost centers, overhead goes to the products that incur it, which gives you more accurate product costs and better pricing decisions.

A Practical Example

A leather goods workshop runs three main work areas:

• Cutting and Skiving — strap cutter, skiving machine. These need regular blade replacement and a separate maintenance budget.
• Stitching — stitching pony, awl press, edge beveller. Low electricity, mostly hand tools.
• Finishing — burnisher, edge paint station, heat gun. Moderate electricity, finishing chemicals are a material cost.

The workshop pays €200 per month extra in ventilation for the cutting area (leather dust is a health hazard). That ventilation cost should go to cutting products, not to stitching or finishing products.

By setting up a "Cutting and Skiving" cost center with a €200/month overhead, only products that use cutting machines carry that ventilation cost. Stitching and finishing products are unaffected.

More Examples Across Craft Types

• Laser & Engraving (CO2 laser, rotary engraver): ventilation system, fume extraction filter replacement.
• 3D Printing (FDM printers, resin printers): air filtration (resin fumes), extra electricity for climate control.
• Kiln Room (pottery kiln, glass kiln): electricity circuit upgrade amortisation, fire suppression.
• Wet Room (dye vat, washing machine): plumbing maintenance, water charges.

Cost Centers Are Optional

If your workshop is simple and most overhead is genuinely shared, you may not need cost centers. They add value when you have distinct work areas with meaningfully different overhead profiles. Start simple and add cost centers when you notice that overhead allocation is causing inaccurate product costs.