A Cost Centre is any unit of an organisation to which transactions (generally, revenue) can be allocated. When only costs or expenses are allocated to these units, they are referred to as Cost Centres. When profits are also allocated to these units, they become Profit Centres. You can now obtain a Profit and Loss account of each such Profit Centre.
Cost Centre in Tally.ERP 9 allows an additional dimension to a transaction where a Ledger account indicates the nature of the transaction. It does not readily disclose, except in the narration field, which part of the organisation was involved in the transaction.
With the help of Cost Centres, a transaction can be allocated to it, which would then enable accumulation of the all transactions for that particular Cost Centre. Tally.ERP 9 gives you the Cost Centre break-up of each transaction as well as details of transactions for each Cost Centre.
Some examples of Cost Centres are
Departments of an organisation - Finance, Manufacturing, Marketing, and so on.
Products of a company.
Individuals such as Salesman A, Salesman B.
Use of Cost Centres
You can classify Cost Centres, just as how you classify Group/Ledger accounts. You can have Primary Cost Centres and several levels of Cost Centres under each Primary Cost Centre.
Consider the following example.
Primary Cost Centres - Finance, Manufacturing, Marketing.
Under Marketing, classify the company's sales executives as Cost Centres. This will help you track a sales executive's performance, in terms of cost and revenue generated.
You will then have the following Cost Centre structure
Primary Cost Centre - Marketing
Allocate expenditure incurred on sales by the salesmen, as well as the sales generated by them, directly to their Cost Centres. The allocation is done at the time of voucher entry. This prevents allocation errors at the end of the period.
By allocating expenses and sales transactions to the salesmen, you are setting up a valuable information system that tracks the performance of your salesmen.