Cost centre

What it means

A cost centre is a part of the company whose costs are tracked separately, such as a department, plant, branch, project or machine. It is the basic unit of management accounting and answers the question of where in the company costs arise and who is responsible for them.

Financial accounting sorts costs by nature: materials, wages or services. Cost centres add a second view, by where the cost arises. The same energy invoice is posted to one expense account but split between production, the warehouse and the office.

Besides cost centres, some companies also distinguish profit centres, which track revenue and results too. Centres are the basis for costing, budgets and performance assessment within controlling.

How it works in practice

In the accounting software we set up cost centres as a separate dimension entered on every document, or as analytical accounts. Larger companies may also use internal accounts in account classes 8 and 9. The choice depends on how many views the company needs and how much detail it wants to report.

We assign direct costs to centres straight from the documents. Overheads such as rent, energy or accounting are allocated using an agreed key, such as floor space, headcount or hours worked. We agree the key with management and document it so that results can be compared from month to month.

Every month we prepare an overview of costs by centre compared with the budget and the previous period. For the owner it is a quick way of seeing which branch or job makes money and where costs are growing faster than revenue.

What to watch out for

A badly set allocation key can change the picture completely: a centre that actually makes money looks loss-making because it carries a large share of overheads. Before deciding to close an activity we therefore always look at its contribution to fixed costs, not only at the fully loaded result.

Cost centres work only if they are entered consistently on every document. A missing or randomly chosen centre undermines all the reports, so when implementing them we set up mandatory fields and default centres in the posting templates.