Concept summarized by Sam Mishra, MBA (MIT Sloan)
Entity within a business, whether a department, or a manufacturing plant, or even an individual; to which costs can be allocated by corporate management. Managers of cost centers try to keep actual costs lower than the allocated costs.
Typically, departments such as IT (Information Technology) and accounting within a business are treated as cost centers, since these departments are not perceived as contributors to the firm's top-line (revenue). However, treating IT as a cost center can have its own drawbacks: since cost center managers are rewarded for keeping costs low, the firm might miss out in leveraging IT as a strategic resource which, when properly deployed, can improve sales!
So, before relegating a particular department / unit as a cost or profit center, the strategic implications of such action must be thought through in great detail.