Cost Center Management

Cost center management involves organizing, monitoring, and controlling expenses related to different units within an organization. By categorizing costs under specific departments or business units, organizations ensure efficient allocation and alignment with financial strategies.

Types of Cost Centers

• Production Cost Centers – Departments directly involved in manufacturing.
• Service Cost Centers – Support functions assisting production or operations.
• Revenue Cost Centers – Sales or marketing units generating revenue but also incurring costs.
• Profit Centers – Units responsible for both revenue and expenses (e.g., business divisions).
• Investment Center – Monitors investment-related financial activities.

Managing Cost Center Types in ERP

Adding a Cost Center Type

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1. Click "Cost Center Type Add" to create a new cost center type.
2. Enter Type Name, Code, and Description.
3. Click "Save" to store the information.
4. Review the list to check if the required cost center type already exists.
5. Check Active/Inactive Status:
   • Active: The cost center type is in use and available for selection.
   • Inactive: The cost center type is disabled and cannot be assigned.

Adding a Cost Center

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1. Click "Cost Center Add" to create a new cost center.
2. Select the Cost Center Type from the dropdown list.
3. Select the Category Cost Center from the dropdown list.
4. Enter Cost Center Name, Code (if applicable), and other details.
5. Click "Save" to complete the setup.

Viewing & Managing Cost Centers

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1. Click "Cost Center List" to view all existing cost centers.
2. Review the list for Name, Type, Category, and Code.
3. Check Active/Inactive Status:
   • Active: Available for transactions.
   • Inactive: Cannot be used for new transactions.
4. Use Search or Filter options to find specific cost centers.
5. Click on a cost center to edit, update, or deactivate if needed.

Additional Features

• General Ledger – Cost center-wise transaction view.
• Analysis – Fiscal year-wise income and expense data analytics.

Importance of Cost Centers in Accounting

• Improves financial control and reduces unnecessary expenses.
• Enhances decision-making with department-wise cost tracking.
• Ensures regulatory compliance with clear cost allocation.
• Boosts profitability by optimizing resource allocation.
• Improved Budgeting – Enables accurate allocation of funds to different departments.
• Performance Evaluation – Assesses efficiency by comparing actual vs. budgeted costs.

Key Features in PrismERP

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• Monitor and manage expenses associated with specific cost centers.
• Provides a clear view of spending patterns across business units.
• Generate detailed financial reports based on cost center-wise expenses.
• Cost allocation.
• Performance Measurement – Helps evaluate department-wise efficiency.

Cost Center-Wise Expense Report

• View expenses categorized by cost center.
• Filters available: Users can filter reports by date range and cost center.

How Cost Centers Work in PrismERP

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1. Identification of Cost Centers – Define departments, business units, or divisions as cost centers.
2. Cost Allocation – Assign direct and indirect costs to each cost center.
3. Monitoring & Reporting – Track expenses through financial reports.

Multi-Dimension Cost Center - Cost Allocation

• Structure where costs are allocated across multiple centers, such as departments, Production & Business Units.
• Costs and Income can be split across multiple cost centers on various criteria.
• Complex allocation methods enable better decision-making.

Cost Allocation Methods

• Department-Based: Costs allocated to multiple departments.
• Activity-Based: Costs distributed based on specific activities.
• Time-Based: Various costs allocated per month, quarter, or year.

Classify Costs and Allocation Methods:

Cost Category	Example
Direct Costs	Costs directly attributable to a specific cost center (Material, Factory Overhead)
Indirect Costs	Costs shared among multiple cost centers (Administrative, Sales Distribution, Others (Finance))

Cost Allocation Process

• Use Monthly Allocation: For regular expenses reporting.
• Use Quarterly Allocation: For seasonal or strategic expenses.
• Use Annual Allocation: For fixed, long-term, and regulatory costs.

Allocation Basis:

Category	Accounts & Allocation Method	Process Timeline
Direct Allocation	If a cost is entirely related to one cost center, assign it directly.	Immediate
Fixed Percentage	Predefined percentage allocation for shared costs.	Periodic
Proportional Allocation	Based on the ratio of relevant data like revenue or production.	Periodic
Revenue-Based	Allocate based on each cost center’s revenue contribution.	Monthly, Quarterly, Yearly
Production-Based	Allocate based on each cost center’s production unit.	Monthly, Quarterly, Yearly

Allocation Methods for Specific Categories

1. Usage-Based: Allocate based on resource usage (Rent, Utility, Transportation, Fuel, Maintenance).
2. Activity-Based: Allocate based on actual cost-driving activities.
3. Headcount-Based: Allocate based on the number of employees in a cost center.
4. Labor Hours: If production is labor-intensive.

Apply Review & Validate Allocation:

• Ensure accuracy by reconciling total allocated costs with actual expenditures.
• Validate with finance teams and department heads for alignment.

Use Case

Various Cost Centers:

• Production/Operational Cost Centers
• Service Cost Centers
• Administrative Cost Centers
• Sales & Marketing Cost Centers
• Distribution & Logistics Cost Centers

Cost Category

Direct Cost	Indirect Cost	Administrative Cost	Sales Cost	Distribution Cost
Raw materials	Production	Office expenses	Advertising & promotions	Rent & Warehousing
Direct labor costs	Factory Overheads	Salaries & wages	Sales commissions	Inventory handling
	Equipment Depreciation	Compliance costs	Trade shows & sponsorships	Fuel & vehicle maintenance

Cost Allocation Process for Production Costs

Efficient cost allocation is essential for tracking Factory Overheads, Equipment Depreciation, Utilities, and Repair & Maintenance in production.

Step-by-Step Cost Allocation Process

1. Identify Total Costs for Each Category & COA

Cost Category	Total Cost
Factory Overheads	$50,000/month
Equipment Depreciation	$20,000/month
Utilities (Electricity, Gas, Water)	$30,000/month
Repair & Maintenance	$15,000/month

2. Determine Allocation Bases

Cost Category	Allocation Basis	Example Calculation
Factory Overheads	Production Volume	Overhead Rate = $50,000 ÷ 10,000 tons = $5 per ton
Equipment Depreciation	Machine Hours	Depreciation Rate = $20,000 ÷ 10,000 hours = $2 per machine hour
Utilities	Usage (kWh)	Allocate based on machine usage (e.g., Machine X: $10,800)
Repair & Maintenance	Historical Repair Costs	Allocate based on past maintenance costs per machine (e.g., Machine X: $4,500)

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Sales

1. Identify Total Sales Costs

Sales Cost Category	Total Cost
Advertising & Promotions	$50,000
Sales Commissions (Direct)	$30,000
Sales Commissions (Indirect)	$20,000
Trade Shows & Sponsorships	$15,000
Customer Acquisition Costs	$25,000
Total Sales Costs	$140,000

2. Choose Allocation Bases

Sales Cost Category	Allocation Basis	Basis Details
Advertising & Promotions	Sales Revenue	Allocate based on sales revenue generated by each department.
Sales Commissions (Direct)	Sales Volume	Allocate based on sales volume or revenue generated by sales reps.
Sales Commissions (Indirect)	Headcount or Sales Revenue	Allocate based on indirect commissions.
Trade Shows & Sponsorships	Sales Volume or Product Focus	Allocate based on sales volume or products promoted.
Customer Acquisition Costs	New Customers or Revenue	Allocate based on new customers acquired.

3. Calculate Allocations Based on Chosen Basis

Sales Cost Category	Dept A Allocation	Dept B Allocation	Dept C Allocation
Advertising & Promotions	$12,500	$20,000	$17,500
Sales Commissions (Direct)	$7,500	$11,250	$11,250
Sales Commissions (Indirect)	$5,000	$8,000	$7,000
Trade Shows & Sponsorships	$3,750	$6,000	$5,250
Customer Acquisition Costs	$6,250	$9,375	$9,375

4. Final Summary of Allocated Sales Costs

Department	Advertising & Promotions	Direct Sales Commissions	Indirect Sales Commissions	Trade Shows & Sponsorships	Customer Acquisition Costs	Total Sales Costs
Dept A	$12,500	$7,500	$5,000	$3,750	$6,250	$35,000
Dept B	$20,000	$11,250	$8,000	$6,000	$9,375	$54,625
Dept C	$17,500	$11,250	$7,000	$5,250	$9,375	$50,375

Distribution

1. Identify Total Distribution Costs

Distribution Cost Category	Total Cost
Rent & Warehousing	$40,000
Inventory Handling	$25,000
Fuel & Vehicle Maintenance	$15,000
Third-Party Logistics Fees	$20,000
Total Distribution Costs	$100,000

2. Choose Allocation Bases

Distribution Cost Category	Allocation Basis	Basis Details
Rent & Warehousing	Warehouse Space	Allocate based on space occupied in the warehouse.
Inventory Handling	Units Handled	Allocate based on units handled by each department.
Fuel & Vehicle Maintenance	Distribution Volume	Allocate based on miles or volume traveled.
Third-Party Logistics Fees	Units Shipped	Allocate based on the volume of goods shipped.

3. Calculate Allocations Based on Chosen Basis

Distribution Cost Category	Dept A Allocation	Dept B Allocation	Dept C Allocation
Rent & Warehousing	$10,000	$15,000	$15,000
Inventory Handling	$6,250	$9,375	$9,375
Fuel & Vehicle Maintenance	$3,750	$5,625	$5,625
Third-Party Logistics Fees	$5,000	$7,500	$7,500

4. Final Summary of Allocated Distribution Costs

Department	Rent & Warehousing	Inventory Handling	Fuel & Vehicle Maintenance	Third-Party Logistics Fees	Total Distribution Costs
Dept A	$10,000	$6,250	$3,750	$5,000	$25,000
Dept B	$15,000	$9,375	$5,625	$7,500	$37,500
Dept C	$15,000	$9,375	$5,625	$7,500	$37,500