Cost Center Hierarchy and Performance Management
Posted by Dylan Wan on January 27, 2008
Cost Center Hierarchy is an important dimension is the Performance Management system. The cost center concept is described in many Managerial Accounting books. I think that going back to where it was originated help us to understand how it should be designed and used in a Business Analytics Data Warehouse.
A cost center is described as an essential element used in the responsibility accounting reporting system. Here are the major concepts about the responsibility accounting and cost center described in the managerial accounting field.
- Top management can control all costs. Fewer cost controllable as one moves down to lower level of management
- The evaluation of a manager’s performance should be based on matters that the manager directly controls.
- The costs controlled by a cost center can be rolled up to a higher level. e.g. the cost controllable by the regional marketing managers are controllable by the VP of marketing.
- It is necessary to distinguish between controllable and non-controllable costs at each level.
- When the level moves up, additional controllable costs should be included.
- Depending on the degree of responsibility that the manager has, a responsibility center may be a cost center, a profit center, and an investment center.
Cost Centers are also implemented in the ERP and Accounting systems. It is good to review how they are defined in the major ERPs, SAP, E-Business Suite, PeopleSoft, and JD Edwards.
Cost Center Hierarchy in SAP
Responsibility accounting is the focus of the Controlling – Cost Center Accounting module (CO-CCA). Cost centers are defined in the CO-CCA.
When implementing the CO (Controlling) module, creating the Controlling area is one of the first steps. SAP has provided standard controlling areas ‘0001’. You also need to assign the company code to the controlling area. A controlling area is broken down into cost centers, which are organized in a “standard cost center hierarchy”.
A Cost Center is a unit that represents a revenue and cost collector for permanent activities.
A cost center can be linked to a company code, a business area, a functional area, a fund, a fund center and a profit center allowing all these codes to be automatically defaulted when a user enters a cost center in a document. Costs and revenues posted to a cost center can thus be automatically posted to the company code, business area, fund, fund center and profit center linked to the cost center.
A standard hierarchy of cost centers is required for the controlling area and is used by drill-down reports. In addition Cost Centers may optionally belong to additional alternative hierarchies that can also be used by drill-down reports.
Cost Center in E-Business Suite
Cost Center is defined as part of GL account in the Cost Center segment.