Understanding Cost Center Accounting in Financial Management

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Delve into the world of cost center accounting within financial management, exploring topics such as allocation of cost centers, control of profitability, distribution of costs, hierarchy levels, and classification criteria. Learn about the tasks involved, overhead rates, and the classification of cost centers based on functional areas and spheres of responsibility.


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  1. Lecture Industrial Costing SS 2016/2017 Prof. Dr. Olga Popova, OVGU Prof. Dr. J rg Jablinski, OWL S mtliche Folien sind urheberrechtlich gesch tzt und d rfen nur zum internen Gebrauch an der Hochschule OWL verwendet werden. Eine Weitergabe an Dritte, egal in welcher Form, oder eine Vervielf ltigung wird untersagt. 1

  2. Chapter 4 Cost center accounting (Part 1) 2

  3. Cost center accounting 3

  4. Cost center accounting within financial accounting Financialaccounting 1. Cost-typeaccounting 2. Costcenter accounting 3. Costunit accounting Calculation Statementof operatingresult 4

  5. Distribution of costs to cost units Overhead costs Directcosts Cost centers Primarycost distribution Primarycost distribution Internal cost allocationsecondary costdistribution Servicecostcenter Maincostcenter Overhead rates Cost units 5

  6. Tasks of cost center accounting Tasks of cost center accounting Allocation of cost centers between costunits Control of profitability Distributionof costs to cost centers Determiningof overheadrates 6

  7. Hierarchy levels of cost centers 7

  8. Classification criteria for cost centers Classificationcriteriafor cost centers Accordingto the type of allocation Accordingto spheresof responsibility Accordingto functional area Accordingto spatial aspect Divisioninto preliminarycost center(indirect accountingfor services) and final costcenter (direct accountingfor services)takes place Classificationof costcenters corresponds to clearly delimited spheresof responsibility Spatial delimited operating sectors belong to onecost center The sameor similarwork processes belong to onecost center 8

  9. Classification according to functional areas Cost centers General Description and Examples for example canteen, electricity supply, house equipment, company doctor services connected with purchasing, reception,control, storage, maintenance, issue of materials (for example purchasing department, testing center, storehouse) operatingoutput of goods (for example grindery,turnery,milling, paintingpoint, installation) distributionof goods and services: finished goods stock, sell and sending of finished goods and spare parts, customer services, commercials administrativeactivities for example management and it s stuff sections, accounting, controlling, personal types of costs, serving for innovations (construction, experiment, laboratory) Recourse centers Production centers Distributioncenter Administrationcenter Researching-and development center 9

  10. Classification according to type of allocation 10

  11. Important: Remember! Final cost centers provide activities; that are directly incorporated to a product. However preliminary cost centers pass activities to another cost centers, it means its activities will be allocated to final cost centers indirectly, using assessments. 11

  12. Description of cost centers 12

  13. Allocation of overhead costs 13

  14. Principles of cost center formation 14

  15. Cost allocation sheet 15

  16. Example: Primary distribution of overhead costs The starting point for distribution of overhead costs in the example company Feuer is following simple cost center classification: material, production, distribution and administration. Nonproductive labor costs and salaries will be separated in accord to job description of employees and activity reports. Cost centers Cost types Nonproductive labour costs 8.400,- 106.800,- Salaries 24.000,- 69.600,- 104.400,- 48.000,- Material Production Administration Distribution Non-wage labor costs must be considered accepting social cost rates, which amounts to 65 % for nonproductive labor costs and 40 % for salaries. 16

  17. Example: Primary distribution of overhead costs Value of auxiliary and operating materials will be determined using purchase invoice and fixed valuation method, it amounts to 28.800,- and belongs to the cost center Production . Electricity- and heating fuel costs amount to 115.000,- . 115.000,- will be distributed between different sectors, for one thing according to cubic meter (m ) of space, for another thing according to electrical connected values. Distribution formula is: 3 : 100 : 6 : 6 (Material, Production, Administration, Distribution). The sum from formula amounts to 115. To the distribution cost center will be assessed for example (115.000,- : 115) x 6= 6.000,- . Imputed depreciations: The buildings will be depreciated over 50 years and the machines over 10 years. 17

  18. Example: Primary distribution of overhead costs Acquisition values of buildings 512.000,- 3.297.600,- 577.600,- 252.800,- Acquisition values of machines 416.000,- 7.260.800,- 100.800,- 222.400,- Material Production Administration Distribution Imputed interest will be prorated to different cost centers on base of average committed operating capital. Discount rate amounts to 8 % per year. Cost centers Sum Material Production Administration Distribution Operating capital 13.900,- T 2.700,- T 8.500,- T 800,- T 1.900,- T 18

  19. Example: Primary distribution of overhead costs Area of activity of entrepreneur is connected with following two departments: 80 % of his work is connected with administration and 20 % with distribution (this corresponds to the relation 4:1). Imputed entrepreneurial profit amounts to 110.000,- per year. Distribution of other costs leads us to following results: Cost types Cost centers Trips, commercials 5.000,- 2.000,- 126.000,- 128.000,- 261.000,- Other overhead costs 17.800,- 59.600,- 50.300,- 23.300,- 151.000,- Insurance, taxes 24.000,- 91.000,- 95.000,- 15.000,- 225.000,- Material Production Administration Distribution Sum Overhead costs of company Feuer will be distributed between four main cost centers in the following way: 19

  20. Example: Primary distribution of overhead costs 20

  21. Example: Primary distribution of overhead costs Imputed depreciations and imputed interest will be calculated for cost allocation sheet in the following way: 21

  22. Types of internal activities 22

  23. Methods of internal cost allocation 23

  24. One-sided exchange of activities according to direct method 24

  25. One-sided exchange of activities according to step ladder method 25

  26. Mutual exchange of activities 26

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