What is a cost centre (cost center)?
A profit and loss statement tells you that rent, salaries and fuel cost a certain amount last month. It does not tell you whether the warehouse or the sales team drove the increase. That is the question cost centres answer.
What a cost centre is
A cost centre is an organisational unit that collects costs: a department, a location, a team or a function. Each cost centre has one person responsible for its spending, and each cost is booked to one cost centre or split between several by an agreed rule. It is a management accounting tool for steering the business, not for tax returns.
Cost centre, cost category and profit centre
- A cost category, or cost type, says what the money went on: rent, wages, fuel, software.
- A cost centre says where it was spent: the warehouse, the sales team, store 2.
- A profit centre is a unit that has both revenue and costs, such as a store or a business line, so its result can be measured as a profit.
- A cost object, in German practice the Kostenträger, is what the cost is ultimately for: a product, an order or a project.
One cost therefore has two coordinates. The fuel bill of the delivery van is the category fuel in the cost centre logistics.
A small example (illustrative numbers)
A trading company of 15 people sets up three cost centres: warehouse, sales and administration. Wages are booked directly to the centre where each person works. Rent of 6,000 EUR a month is shared by floor area: the warehouse uses 70% of the space, so it carries 4,200 EUR, sales 1,200 EUR and administration 600 EUR. When warehouse costs rise by 20% in a quarter, the owner now knows whom to ask and can compare it with the volume shipped.
How to set them up
- Start with few: three to eight cost centres are enough for most small companies.
- Follow responsibility: each cost centre needs one owner who can influence its costs.
- Write down the rule for shared costs, such as floor area for rent or headcount for software, and keep it stable.
How cost centres must be reflected in statutory accounts, if at all, depends on your country and accounting system, so check with your accountant.
Cost centres in OrgLines
OrgLines Finance is management finance, not statutory bookkeeping. You keep your own list of income and expense categories and can add dimensions such as business line, department or project to split amounts along them instead of seeing one total. A dimension lives separately from the ERP, because a planned business line may have no operational counterpart yet; where there is one, you can store the reference to the ERP record.