A cost centre can be defined as a separate department or function within an organisation where costs are allocated. It does not directly contribute to profit but still costs money to run, such as the accounting, human resources, or information technology departments. When just costs or expenses are assigned to these units, they are referred to as Cost Centres.
Cost Centre in Tally
Cost Centre in Tally can be defined as an organisational unit in a company. In this unit, expenses are allocated in terms of transactions. On the contrary, different cost categories are used for gathering costs or profits.
For example, the employees of the cost centre, are not responsible for the profitability or investment decisions of the company, but they are a part of the company, and hence can be categorised as a part of organisational costs. Cost centres are assigned for doing transactions. They can be classified in the same way that Group/Ledger accounts are done in a company. Each Primary Cost Centre can have several levels of Cost Centres beneath it.
What is included in cost centres?
Some of the cost centres in tally with example are as follows:
- Finance, manufacturing, marketing, and so on are cost centre examples of various departments within an organisation.
- A company's production process
Consider the following example:
- Finance, Manufacturing, and Marketing are the primary cost centres.
- Assigning sales executives such as Salesman A and Salesman B to Cost Centres under Marketing can be categorised as sub-units under this department's Cost Centres. This will enable you to track a salesperson's cost and revenue generated performance.
By doing this, you're able to put together a useful information system that keeps track of your various performances by allocating expenses and sales transactions to them.
What are the benefits of Cost Centre?
- Performance can now be monitored more easily: Having a cost centre helps measure performance using Key Performance Indicators (KPI). This helps each cost centre unit in planning and evaluation in an orderly and detailed manner.
- Improved efficiency, thereby increasing profitability: Upper management can easily identify areas where efficiency can be improved with a cost centre. It assists management in making better use of resources by providing a better understanding of how they are being used. A cost centre indirectly contributes to a company's profit through operational excellence, customer service, and increased product value.
- Improved monitoring and control: CEOs and business owners can monitor and control expenses by using cost centres. All expenses are recorded and booked in a specific cost centre to know the cost of a specific unit and how resources are used.
- Increase accountability by comparing budgets: A cost centre’s primary function is to track actual expenses compared to an estimated budget or budgets of other months. A unit's budget is evaluated by grouping all costs into cost centres and dividing the budget by cost centre. This helps in understanding which department has lower performance and which has higher. The manager must justify any difference between the estimated budget and the actual.
Is there any difference between Cost Centre and Cost Category?
The cost centre in Tally.ERP 9 is an organisational unit in which costs or expenses can be assigned. On the other hand, a cost category is a grouping of similar costs through which cost centres can evaluate cost limits or expenses.
Cost centres, for example, can be used to track each department spendings, while cost categories can be used to assess the effectiveness of each project in a department of a company.
What is the difference between a Cost Unit and Cost Centre?
Cost Unit is a standardised method of measuring costs. It facilitates a comparison between different costs produced by a company to produce, store, and sell one unit of products or services. On the contrary, the Cost Centre is a separate department where business costs are incurred from different organisational departments.
The cost unit in the road-building business, for example, is Km or m. Another example is that the cubic meter is the cost unit in the gas sector, whereas a Cost Centre example is customer service, advertising, marketing, etc.
Learn how to create a cost centre in tally
Steps to enable cost centre and cost category in Tally ERP 9
- Go to Gateway of Tally
- Press F11, you will land on the Company Feature page
- Select Accounting Features
- Set Maintain cost centre to ‘Yes.’
- For several payroll or expense categories, select ‘Yes.’
- Press Ctrl + A to save the parameters.
For Ledger accounts such as Purchase Accounts, Sales Accounts, Income and Expense groups, Tally.ERP 9 enables the Cost Centre function by default.
After setting the parameters, you have to create cost centres to which the costs would be allocated.
Also Read: Shortcut Keys in Tally Prime
Steps to create Tally cost centre
- Go to Gateway of Tally.ERP 9
- Then click Accounts Info
- Select Cost Centre
Now you can select Create under ‘Single Cost Centre’ to create one cost centre at a time or select ‘Multiple Cost Centres’ for making all the cost centres at one go.
To achieve this, choose the Cost Category under which you wish to classify the newly created cost centre, and then follow the steps below:
- Go to Gateway of Tally
- Click Accounts Info.
- Click Cost Categories
Now you can select Create under ‘Single Cost Category’ to create one cost category at a time:
- Enter the Name of the cost category.
- Set the Allocate Revenue Items option and click Yes to assign all sales to the cost centres formed under this cost category for purchases, expenses, and income-related transactions.
- Select the option ‘Yes’ Allo cate Non-Revenue Items from the drop-down menu.
The cost centre window appears as shown below:
Or you can also select ‘Multiple Cost Categories’ for making all the cost categories at one go:
- Enter the Name of the cost category.
- Set the Allocate Revenue Items option.
- Select the option ‘Yes’ to Allocate Non-Revenue Items from the drop-down menu.
- Press Enter.
- Fill in the Name of the Category and the Required Allocations for the Category.
The Multi Cost Category Creation window looks like this:
Press Enter to save.
Enter the Cost Category name and accept the screen.
Alter a Cost Centre
If any adjustments are required, you can change an existing cost centre in a single mode. Alternatively, many cost centres can be changed in a variety of ways by following the respective steps:
- Go to Gateway of Tally; from there, go to Accounts Info.
- Then click Alter either und er ‘Single Cost Centre’ if you intend to modify one by one or under ‘Multiple Cost Centres’ to change all at one go. The Cost Centre Alteration appears as shown below.
3. Make the required changes.
4. Press Ctrl + A to save.
Delete a Cost Centre
Cost Centres can also be deleted in the alteration mode according to the respective steps:
- Go t o Gateway of Tally, from there go to Accounts Info.,
- Click Alter either under ‘Single Cost Centre’ if you intend to modify one by one or under ‘Multiple Cost Centres’ to change all at one go.
- From the Cost Centres List, choose the Cost Centre you want to work with. The screen for Cost Center Alteration appears.
- Click Alt D to Delete.
- Then click Enter to confirm the deletion.
Note: A cost centre can be deleted only if:
- It does not have any Cost Centres created under it.
- It has not been used for any transactions.
After creating the cost centre and cost categories, you have to apply cost centres to the ledger accounts.
To enable the Cost Centre for Payment ledger – transportation account, for example, go to Gateway of Tally>Accounts Info.>Ledger>Create.
Set cost centres are applicable to Yes.
For cost centre allocation in the voucher:
- Cost Centre allocations must be completed in the main voucher entry screen's pop-up sub-screens.
- After the amount fields for the ledger for which cost centres have been activated, the sub-screen appears. As a result, the ledger Conveyance A/c sub-screen looks like this:
3. The payment voucher entry screen appears once the Cost Centres have been assigned.
4. The cost of total conveyance expense of Rs. 2500 distributed to cost centres (Salesman A & B).
How to create reports in Cost Centre in Tally ERP 9?
Cost Centre in Tally ERP 9 delivers reports that display complete data of all cost centres and their linked transactions in various ways for quick identification and detailed study of how expenses are allocated to business units.
The name and features are enumerated below:
Type of cost centre report
Path to Generate Report
The Cost Category Summary shows all of the cost categories to which the voucher transactions have been assigned.
Gateway of Tally> Display> Statements of Accounts> Cost Centres
Cost Centre Break-Up
The cost centre break-up highlights the ledger accounts utilised in vouchers, to which cost centre they were assigned, their total transaction values, and their balance.
To use the Cost Centre break-up screen:
The Ledger break-up report is another observation of the distribution of a ledger account across various cost centres in a company.
To use the Ledger break-up screen:
Group Break Up
The Group break-up of cost centre report gives you a distinct perspective on a cost centre report by allowing you to examine how a group (of ledger accounts) is distributed across multiple cost centres.
To use the Group break-up screen:
The path to proceed to the cost centre report is as below:
- Gateway of Tally
- Display Menu
- Statements of Accounts
- Cost Centres
The ‘Cost Category Summary' report, for example, is displayed below:
Knowing how to calculate cost centres in Tally. ERP 9 is vital for a company. It's crucial since it not only lets you distribute spending to different units but also allows you to track cost centre reports, allowing you to make strategic decisions.
Due to this, you can use Cost Centres in Tally, easy-to-use software that accounts for your accounting and inventory activities. Its simple functionalities simplify business owners to record and track all of their records without too much effort. Biz Analyst is one such app that helps in analysing and developing such reports with ease.