Cost Center Reports and Analysis

Cost Center Reports and Analysis

Any activity can be analysed by its costs and the ’output’ it generates. A business might want to know the cost of running a production line compared to other production lines or ways of producing things. Similarly, a firm might want to look at the total cost of running training courses (salary, rents, training materials, utilities and so on) compared to the number of people actually trained.

Cost centre analysis tries to attribute all costs involved in a particular activity to one ’location’ or ’cost centre’. To calculate costs involved in a particular activity it is necessary to calculate the cost of:

Materials

All materials used directly  and materials used indirectly (for instance packaging).

Labour

All labour costs directly involved and the proportionate cost of any supporting labour (for instance

administrative staff).

Sales And Marketing Costs

Regular, on-going costs of advertising and promotion of that activity’s product or service.

Overheads

Proportionate costs of regular expenses associated with that activity such as rent, rates, power, interest repayments, other charges.

Additional Costs

Other costs solely attributable to the activity (for instance higher insurance costs for a new machine).

Example

ABC Novelties company  management want to know the real cost of manufacturing toys. Materials used cost $2,000 per year. Production involves 5 trainees paid $500 expenses each per year. The single machine

used is used for toy production 20% of the time and full depreciation is valued at $1,000 per year. Electricity costs $600 a year and toy production takes up half of a workshop costing $2,000 in rent, rates and repairs

per year. The paid administration worker calculates that he spends 30% of his time on book-keeping, sales and marketing toys. He is paid $8,000 per year. The total income of the project is $25,000 per year

and sales of toys contribute $5,000 to this. 

Its total costs are $24,500 per year.

Cost Centre Analysis

Materials            =    $2000

Labour (5 x $500) =   2500

Depreciation ($1,000 x 20%)   =  200

Electricity ($600 x 20%)   =  120

Rent ($2,000 / 2) =           1000

Administration ($8,000 x 30%) = 2400

Total                 =   8220

From these figures we can calculate the following:

Toy making is responsible for 34% of all costs ($8,220 / $24,500 x 100)

Toy making generates only 20% of all income ($5,000 / $25,000 x 100)


For further reading;

https://www.seattleu.edu/controllers-office/departmental-budget-management/responsibility-of-cost-center-or-department-manager/

http://accounting-financial-tax.com/2009/01/how-to-measure-the-performance-of-a-cost-center/

https://www.wrexham.gov.uk/assets/pdfs/business/se_manual/62_cost_centre.pdf


Updated 26 August 2017, 22 April 2016