What is a Cost Center?
A cost center is an accounting classification used to allocate expenses to specific units within an organization, with the aim of accurately tracking the cost of each unit and monitoring expenditures more precisely.
For example, if an organization has multiple branches, a separate cost center can be created for each branch. Expenses and accounting entries are then assigned to the relevant branch, allowing the organization to later determine the cost of each branch independently.
Types of Cost Centers
The system currently supports the following types of cost centers:
1. General
A “General” cost center is used in cases where expenses are not directly linked to a specific branch, department, or project.
It can be used to track general costs such as administrative expenses, employee-related costs, custody expenses, warehouses, or any internal classification the organization wishes to monitor as an independent cost center.
2. Branch
A “Branch” cost center is used to track expenses related to a specific branch.
Example: a cost center can be created for the Riyadh branch and another for the Jeddah branch, and expenses or accounting entries are then allocated to each branch based on cost distribution ratios.
3. Department
A “Department” cost center is used to track costs according to internal departments within the organization.
Example: Sales, Operations, Marketing, or Support departments.
4. Project
A “Project” cost center is used to track expenses related to a specific project.
Example: opening a new branch project, a marketing campaign, or a temporary operational project.
How Do Cost Centers Work in the System?
Cost centers are linked to accounting entries within the Accounting module.
When creating a journal entry, one or more cost centers can be assigned, along with the percentage of cost allocation for each center.
Once the entry is saved, the cost for each cost center is calculated based on the defined percentage. This enables accurate reporting and analysis by cost center, providing better visibility into how expenses are distributed across the organization.
Example of Allocating a Journal Entry to Cost Centers
If an organization has an expense of 10,000 SAR and wants to distribute it across multiple cost centers, it can be recorded as follows:
60% to the Riyadh Branch cost center
40% to the New Branch Opening Project cost center
Accordingly, 6,000 SAR will be allocated to the Riyadh branch and 4,000 SAR to the project.
This allocation helps management identify which unit incurred the cost and enables better monitoring of expenses across branches, projects, and departments.
Can Cost Centers Be Used for Employees or Warehouses?
Yes, cost centers can be used for employees or warehouses depending on how the organization is structured.
If the organization needs to track the costs of a specific employee or warehouse independently, a “General” cost center can be created for that entity, or the cost can be assigned to the appropriate branch or department based on the nature of the transaction.
Examples:
A General cost center for a main warehouse
A General cost center for a specific employee
A Branch cost center for expenses related to a specific branch
A Department cost center for expenses related to a specific department
When Are Cost Centers Used?
Cost centers are used when an organization wants to analyze expenses and costs in detail, rather than only recording them for accounting purposes.
Examples of use cases include:
Identifying the cost of each branch
Analyzing departmental expenses
Tracking project-related costs
Allocating shared expenses across multiple entities
Monitoring general costs such as warehouses, custody expenses, or employees
Improving the clarity of financial and management reporting
Difference Between an Accounting Account and a Cost Center
An accounting account defines the type of transaction or expense, such as rent, salaries, operating expenses, or purchases.
A cost center, on the other hand, identifies the entity that incurred the cost, such as the Riyadh branch, the Sales department, or a specific project.
Example:
If a rent expense is recorded, the accounting account would be “Rent Expense,” while the cost center determines whether this rent belongs to the Riyadh branch, the Jeddah branch, or a specific department.
Summary
Cost centers help distribute and analyze expenses within an organization with greater accuracy.
By linking them to accounting entries, one or more cost centers can be assigned to each entry, and the entry amount is allocated based on predefined cost-sharing percentages.
The available types of cost centers are:
General
Branch
Department
Project