What are the cost centers
The impact of cost centers
Cost centers are related to the company's profit as they manage operational efficiency, customer service or increase the value of the product. Cost centers help managers to use resources in a more efficient way, based on an understanding of how they are used now. Although the cost centers contribute to receiving income, it is impossible to determine how much revenue was generated by the these centers. Any activities of these units, related to gaining profit or generation of the income, are not taken into account when it comes to internal management purposes.
The main function of the cost centers is to track expenses. Employees, who spend funds within the cost centers, are responsible only for expenses and do not bear any responsibility concerning income or investment decisions. The allocation of expenses between cost centers allows you to control total costs better . Thus, resource accounting takes place at a higher and more detailed level, for example, at the cost center level. And this allows to have more accurate forecasts and calculations based on future changes.
How to use and set up cost centers in Precoro
In Precoro you can set up cost centers in accordance with the requirements of the company.
Find "Attribute Administration" in the "Settings" section.
Here you can add all company's cost centers in the form of attributes.
Cost centers could have the following types of attributes:
List attributes are commonly used for cost centers.
Such attributes as text and date can be used to indicate additional characteristics to the product in order to explain the need to the supplier better.
Specific attributes could be used for particular purposes. They can be divided into:
- Request for delivery. It means that your attribute will be available in the relevant request
- Purchasing. The attribute will be available in purchase requests and orders
- Catalog. The attribute will be available only in the catalog and not shown in requests or orders. However, its indicators will be taken into account when creating reports
Purchasing and catalog attributes are displayed in reports. If your company uses budgets, the procurement attributes are displayed and allocated in the appropriate budget.
When creating a request / order, having customized attributes, you will be able to specify the cost center for each product / service.
Examples of using the cost centers
The type or name of the cost center depends on the needs of the company's management.
Cost centers could be divided on types by the spheres of company's work
- Development and marketing
- Movie studios and theatrical companies
- Media and publishing houses
- Pharmaceuticals, medicine and laboratories
- Retailers and manufacturers
All enterprises have their own costs and profit centers.
Let's learn more about various spheres.
Development and marketing
For development companies profit centers represent current projects or individual clients.
For this reason, managers are responsible for tracking expenses and keeping them within the budget of each project or client.
Each project has its own costs, like
- Developers, testers, managers and other employees' salaries
- Display advertising
- Photo and video production
- Content development
- Office expenses
- Business meetings
Each client can have the same costs. The main difference from the management of costs on the project is that you calculate the total costs for office, food, equipment and other company's expenses, as these costs are necessary for company existing and the ability to get customers. The more customers company reaches, the less the amount of monthly expenses it has on each client.
Each school has its own units of structural subdivisions (similar to departments).
It could be:
- preschool education
- Junior School
- Secondary School
- High School
- First-aid post
- Management and school board
Each of these units spends money on their needs.
And they must be included into the cost account using the "request-approval-purchase order" process.
The cost accounting rules are described in IFRS and / or PSBO for non-profit organizations and they are regulated in each country.
Photo and video production
Production company provides a physical basis for works in the fields of performing arts, media art, cinema, television, radio and video.
As a rule, such companies have many projects / units / types of costs / stages of the working process. Each project/ unit has its own cost centers, but they can be similar.
The main responsibility for cost management in production companies lies in calculating the expenses and profit for each project / unit.
Below you can see an example of the list of costs.
In order to create such report for each project / show manually, you must collect information about all purchases / costs / payments from your employees and sort this data.
In general, each company has a similar situation:
1) An accountant or CFO receives emails:
From the director:
This week we spent 186000 $.
In the attachment you can find our invoices and a receipt.
From the choreographer:
Last week we had to buy new suits.
I forgot to take the bill, I'll send it tomorrow!
2) Every month you have to pay for services, salaries, rent and other expenses.
If you want to understand and calculate your profitability, you should track all your expenses at the moment!
What you need to do with the purpose to simplify cost tracking with the help of Precoro
- First of all, provide an opportunity for your employees to create purchase / costs requests before they are made.
- Choose the person who will be responsible for creating orders from requests, taking into account each order in the budget and tracking its execution
- Customize your own cost centers with the help of functional attributes
- Add your projects or structural units in the form of locations
- Configure reconciliation of the requests or orders
- Monitor the implementation of budgets and download the necessary reports on costs every month or any other specified period.