Requesting simple guidance to Cost Centers

ERPNext Accounting
1

Hi Team

I’m setting up Cost Centers. I’m wondering if I need Separate Cost Centers for expenses and income. Is it

CASE 1

Company

  • Income > Hardware Sales Income
  • Expenses > Hardware Sales Expenses

Or CASE 2

Company

  • Hardware Sales

    // Then tag both income and expenses to the same cost center?

I’d appreciate some guidance

2

Hi there,

Here is a simple guide on how you can use cost centre. Cost Center Definition: How It Works and Example

But before you start using cost centre you will need to ask what do i want to achieve here? Simple cost control by department or person or profitability by department or both …?

How I would do is in the following 2-3 steps:
Sales: identify products/services as group them (item groups) into different departments / divisions / categories. Example a company like Unilever sells Foods (ice creams, knorr etc) and Beverages (Lipton Iced tea, …)
Department Costs
These department costs should be booked under a cost centre tree in a category structure.
COGS Would be direct costs of making the products (raw, pack, manufacturing).
Then you get a departmental profit and loss.

Department Sales - COGS - Department Costs = Department Gross Profit

There will be some costs that cannot be directly linked to any department. Such as CEO,CFO. Now this needs to be allocated to come to a Departmental Net Profit.

Disclaimer : Conceptually, this is how big companies use cost centres. They have much more complex set up…I am just simplifying.

1 Like
3

Hello @Deepak_Pai

Thank you so much for your response.

According to Investopedia. Cost Centers do not directly add revenue to the company but still costs the company money to run, this contrasted to Profit Centers which add revenue to the company. ERPNext seems to combine the two concepts.

Yes, this makes the “Cost” part (of Cost Center) a bit ironic :slight_smile: But from what I understand, Cost Centers can help us track income and expenses as granular as we can afford to. Which still brings me back to my question of how to tag income and expenses to the Cost Center tree.

You can create a tree of Cost Centers to represent your business better. Each Income / Expense entry is also tagged against a Cost Center. - ERPNext

What is a ‘Cost Center’ - Investopedia

A cost center is a department within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company’s profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions.

Read more: Cost Center Cost Center Definition: How It Works and Example

Thanks

4

I stumbled upon a similar situation, can somebody guide me in right direction.

  • For a company, having 3 product lines and having operations in 3 countries, is it possible to get P/L statement country vise as well as product line vise.

  • What I can understand, we can create first cost center tree for locations (as group nodes), then create tree for product lines, or even further, department vise under the product lines.That sort out the first level issue of finding country vise P/L

  • Product line vise P/L is possible for a country, in above setup, but not on overall level that is for all locations, for whole company.And so on with the further bifurcation. With every new tree structure, you are bound to parent group cost center.

  • Location issue can be taken care of by creating separate companies and managing separate products, and account of charts, but then again you can not find product line vise P/L for whole group.

Any suggestions as to how to use cost centers for above scenario.

We need three types of cost centers, Location/Branch vise, Product Line Vise & Department Vise.What is the right way to achieve it.

5

Can anybody explain more about this?