The cost center accounting is used for the exact allocation of costs within the company. Your goal is transparency to create savings potential show and cost planning and controls to allow. Today we will show you what to look for in cost center accounting and how it works.
Definition – cost center accounting
According to gradphysics.com, cost centers are parts of the company that are dealt with and billed independently in terms of costs. Each cost center stands for its own corporate division such as sales, maintenance or repair. A cost center is understood to be an operational accounting unit for which overhead costs are recorded separately and allocated to the cost center users aliquot.
The more precise the division of the cost centers, the more precise the control and planning can be. This then results in corresponding optimization potential, which is uncovered in the course of controlling. However, on the other hand, a finer division of the cost centers also means increased costs, since this accuracy means an administrative effort. The goal of cost center accounting is also strongly influenced by the size of the company.
Cost accounting – what is it?
The cost accounting records all costs that have been incurred in a company.
This method is one of the steps in higher-level cost accounting. In order to better understand the principle of cost center accounting, it is worth taking a look at the structure of the entire cost accounting.
This consists of a total of three sub-areas:
- Cost type accounting : Here all costs are collected and classified according to cost type. The cost type calculation therefore answers the question: WHICH costs have been incurred?
- Cost center accounting : In cost center accounting, the overhead costs – those costs that cannot be assigned to a specific product – are divided among the respective cost centers. In cost center accounting, the question WHERE did the costs arise? answered.
- Cost unit accounting : The last step is the cost unit accounting. A calculation process is used to determine what the costs of a cost unit have been incurred within a defined period.
Cost center accounting in accounting
The cost center accounting is the second sub-area in the cost accounting and serves to break down all costs in such a way that at the end the costs for the individual cost objects – for example a specific product – are available. In accounting, it represents a portion of the cost accounting and forms the basis for cost accounting . It thus represents the link between cost types and cost unit accounting and should accordingly be viewed in the overall context described.
The cost center accounting shows which cost center is doing well economically and where there is still room for improvement. A possible restructuring of the company with the further goal of profit maximization can be carried out on the basis of a regular control of the results. In addition, the knowledge gained can also be used in other forms. For example, they can be used to clarify which margins can be generated with which products. This also shows what a major advantage of cost center accounting is: it enables the calculated values to be used in a variety of ways.
What is cost center accounting?
When it comes to cost accounting, we are in the area of external bookkeeping, and it is also used by controlling to determine success.
As part of the cost center accounting, the individual cost types are charged to the respective cost centers. This process is often called “apportioning” the costs. The aim is an exact, as precise as possible allocation of the costs incurred for the product. It therefore helps to collect those costs that cannot be directly assigned to the product and later to assign them to the cost units according to certain distribution keys. As a company, you can see which product is economically profitable and can then optimize the production range. At the same time, it becomes clear which costs are not directly attributable and therefore have to be distributed using a key. One example of this is renting a production hall in which different goods are manufactured.
Cost center accounting tasks
With cost center accounting, you determine the success of a product by comparing actual costs and services. Thus, it serves the controlling as an instrument for checking the profitability and measuring the achievement of targets. The cost center accounting is thus one of the most important economic instruments to measure the company’s success. In the long term, based on cost center accounting, decisions are made in the company that can significantly contribute to profit maximization. It can thus be said that cost accounting often forms the basis for strategic, economic decisions.
Direct and indirect costs
The individual costs, also called “direct” costs, can be assigned directly to the cost unit. In contrast, the overhead costs, also referred to as “indirect” costs, cannot be assigned directly to the cost unit, as they are transferred to other positions and cannot be clearly assigned. If you add the individual costs and the proportionately allocated overheads, you speak of the total costs.
Practical example:
When making a table, you need various raw materials such as wood and glue.
In this case the table is out of our cost unit and we want to know what costs are incurred for production.
There are direct costs for the raw material wood, because you have precise production specifications as to how much wood you may need per table for completion. The costs of the wood purchased for this table can therefore be directly assigned to the table.
Let’s assume that you don’t need exactly one bottle of glue per table. The adhesive is therefore part of the overhead costs, since the amount cannot be precisely allocated per unit produced and is also used universally in the company for other products such as chairs.
Structure of the cost centers
Within cost center accounting, cost centers are divided into different categories, which we will now introduce to you in more detail.
Auxiliary cost centers
Auxiliary cost centers transfer their services to other cost centers, i.e. the costs incurred here are allocated to the main cost centers. Typical examples in practice are often the canteen or IT service. The process of apportioning these costs is also called internal cost allocation in accounting.
Main cost centers
All costs that arise here are assigned directly to the individual cost bearers through calculation surcharges. The main cost centers are typically the focus of cost accounting.
Ancillary cost centers
All costs of secondary production are recorded here. These are charged directly with the help of a surcharge rate. A common example from practice is waste recycling.
Pre-cost centers
Pre-cost centers generate unfinished products that are necessary for the further production process. In contrast to auxiliary cost centers, these costs fall directly on the production of the specific product and can therefore be added directly.
Process of cost center accounting
We have already conveyed a lot of theory about the various cost centers and cost center accounting in general – now it is time for practice. How exactly does cost center accounting work? We go through the individual steps with you.
Allocation of cost centers
The structure of the cost centers differs depending on the industry and the structure of the company in controlling. However, the classic list of the main cost centers in accounting is usually the following:
- material
- production
- distribution
- administration
However, depending on the company, additional cost centers can be added. Controlling has the task of adapting the cost center accounting to its own specific company requirements and thus optimizing it.
Some companies are also characterized by a certain organizational structure, so the division in controlling can also look like this:
- Classic division according to function: material, production, administration and sales area
- Distribution according to spatial orientation:
- individual locations
- inland
- foreign countries
- Distribution according to areas of responsibility:
- Departments
- People
