Department and Cost Centre Accounting

Cost centres group expenses (and sometimes revenue) by organisational unit so management can hold each unit accountable. The setup takes a day; the discipline takes months. The payoff is a reporting structure that mirrors how you actually run the business.

Cost centres vs profit centres

A cost centre incurs expenses but does not directly generate revenue (HR, IT support, finance team). A profit centre generates both revenue and incurs costs (sales, regional offices). Setting them up is similar; the reporting expectations differ.

For SMEs, a flat list of 5-10 cost centres is usually right. Larger groups may have 50+ across multiple dimensions. Acowntant supports nested cost centres; older systems often only support flat lists. Pick a depth your reporting can handle.

Setting them up

Cost centres are typically a tagging dimension on every transaction, not separate accounts in the chart. So 'Salaries' is one P&L account; cost centre allocates that salary to Sales, Engineering, HR, etc. This keeps the chart small and reports flexible.

Decide once, communicate clearly: every payroll line tags to a cost centre based on the employee's primary function; every supplier bill tags to a cost centre based on which department incurred the cost; shared costs (rent, utilities) are split across centres by an allocation rule.

Allocation rules

Three common bases for shared cost allocation: headcount (rent, utilities, IT licences), square metres (facilities), revenue (general overhead allocated to revenue-generating units). Document the rule for each shared cost and apply consistently.

Re-evaluate allocations annually. Headcount mix shifts as the company evolves. An allocation that was right in year 1 may be wildly wrong by year 3. Acowntant supports automated re-allocation; manual systems require a documented update.

Using the data

Run monthly P&L by cost centre. Department heads should sign off on their P&L each month. Variance from budget triggers conversation, not blame, the goal is shared understanding of where money goes.

Avoid the trap of fully allocating profit to departments. Most cost centres do not generate revenue and forcing an allocation creates fictional numbers. Distinguish between 'operating P&L' (department-controllable) and 'fully-loaded P&L' (with allocations) and use each for its purpose.

This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.