A cost center in tally is simply a separate department within a company to which costs can be assigned. It also includes departments that do not directly produce but incur expenses to the company. For instance – the manager and employees of the cost center are not accountable for the business’s profitability or investment decisions, but they are responsible for some of its costs.
Major Categories of the Cost center
Cost centers are classified into two types.
- Production cost centers are the locations where products are manufactured or processed. An assembly area is an example of this.
- Cost centers: Cost centers associated with the service provision – where services are provided to other cost centers. The personnel department or the canteen are the simplest examples for our purposes.
Cost Center and Tally ERP
In Tally.ERP 9, a cost center, is an organizational unit to which costs or expenses can be assigned during transactions, whereas a cost category is used to accumulate costs or profits for parallel sets of cost centers. For example, we can use a cost center to track each employee’s expenses, whereas a cost category can be used to determine the effectiveness of each project.
Difference between Cost Unit & Cost Center
The cost unit is a standardized way of calculating expenses. It allows for a comparison of different costs incurred by a corporation in the production, storage, and sale of a single unit of goods or services. On the other hand, the Cost Center is a separate department where business expenditures from other organizational areas are incurred.
For example, in the road-building industry, the cost unit is Km or m. Another example is the cubic meter, which is the cost unit in the gas industry, whereas customer service, advertising, and marketing are examples of Cost Centres.
How to Enable Cost Center & Cost Category in Tally ERP
It is a three-step process that can be summarised as follows:
Step 1
Navigate to the Tally Gateway > F – 11: Features > F – 1: Accounting Functions
Step 2
Set the ‘Maintain Cost Centers’ option to ‘Yes.’
Step 3
Set the ‘More than ONE Payroll/ Cost Category’ checkbox to ‘Yes.’
How to Use Cost Center in Tally ERP
Creating cost centers and cost categories: The first step is to make the cost center to which the costs will be assigned.
Step 1
Go to the Tally Gateway.
ERP 9 > Accounts Information > Cost Centres Under Single Cost Centres, click ‘Create.’
Step 2
Choose the Cost Category in which we want to classify the newly created cost center, and then do the following:
Step 3
Navigate to Tally Gateway > Accounts Info > Cost Categories.
Step 4
Choose ‘Create’ from the ‘Single Cost Category’ drop-down menu.
Step 5
Accept the screen after entering the name of the Cost Category.
Allocating expenses to cost centers: The first step in giving fees to cost centers while making payments is to create the expense ledger in the Accounting vouchers section and then pass entry for the payment transaction.
Conclusion
The goal of the cost center is to save money. The breakdown displays the ledger accounts used in vouchers, the cost center to which they were assigned, their total transaction values, and the balance to inculcate the importance of the same. Click here to learn about the depedance of cost center and journal vouchers.