Cost centres: how to design and use them

A cost centre is a part of the business — a branch, department, project or production line — whose costs you want to see separately. It is a second dimension on top of the chart of accounts: the account says what the cost is (rent, salaries), the cost centre says where it belongs. If revenue is tagged too, it becomes a profit centre.

Choosing cost centres

• Start from the decision you want to make: "is this branch worth keeping?" needs a cost centre per branch.
• Keep the list short. Five to fifteen cost centres are enough for most small and medium companies.
• Do not duplicate the chart of accounts: "Salaries – Branch A" belongs as the Salaries account plus the Branch A cost centre, not as a new account.
• Name an owner for each cost centre who reviews its report every month.

Allocating shared costs

Some costs — head-office rent, the accountant's salary, the internet line — serve every cost centre. Record them against a "shared" or "head office" cost centre, then at month end allocate them with one journal entry using a fair basis: floor area for rent, headcount for HR costs, revenue for general overhead. Write the basis down and keep it the same from month to month, or the comparison between periods is meaningless.

Cost centres and budgets

A budget says what each account is expected to cost; a cost-centre report says where the money actually went. Used together, they show both whether spending is on plan and which part of the business is off plan.