Cost Centres

Prerequisites: Module 21 — Bank Reconciliation Statement

Learning Objectives

By the end of this module, you will be able to:

• Explain why cost centre tracking is needed
• Create cost centres and cost categories in Tally
• Allocate expenses to specific cost centres during voucher entry
• Generate and interpret cost centre summary reports

What Is a Cost Centre?

A Cost Centre is any department, project, team, or branch that incurs costs. By tagging expenses with a cost centre, management can answer questions like:

• "How much does the Sales team cost us per month?"
• "Which branch is the most profitable?"
• "Is the Accounts department overspending?"

Without cost centres, all ₹1,50,000 salary goes to one "Salary" expense account — no visibility into which team incurred it.

Cost Centre vs Cost Category

Tally provides two levels:

Cost Category — The top-level grouping (e.g., "Departments" or "Projects") Cost Centres — Individual units under each category (e.g., Sales, Accounts, Operations under "Departments")

For most small businesses, one cost category (Departments) is sufficient.

Enabling Cost Centres in Tally

Gateway → F11 (Features) → Accounting Features
→ Maintain Cost Centres: Yes
→ More than one Payroll or Cost Category: No (single category for now)
→ Use Cost Centre for Job Costing: No (advanced — skip for now)

Sunrise Retail — Case Study Application

Step 1: Create Cost Centres

Gateway → Masters → Accounts → Cost Centres → Create

Create the following:

Who goes where:

Step 2: Enable Cost Centre in the Salary Ledger

Gateway → Masters → Accounts → Ledgers → Alter → Salary
→ Use for Cost Centres: Yes

Any time this ledger is used in a voucher, Tally will prompt for cost centre allocation.

Step 3: Record April Salary with Cost Centre Allocation

Gateway → Accounting Vouchers → F5 (Payment)
Date: 25-Apr-2025
Narration: April 2025 salaries paid via NEFT

Credit: SBI Current Account — ₹1,50,000

Debit: Salary A/c — ₹1,50,000

When debiting Salary, Tally asks: "Allocate to Cost Centres?"

(Note: In the scenario above, Kiran and Sneha as directors are grouped under Management. Sneha is Finance Director but directors' salaries are classified under Management cost centre to distinguish from accounting staff.)

April Salary Journal Entry:

Total salary debit: ₹1,50,000. Cost centre total = ₹1,50,000. Both match ✓

Step 4: Allocate Other Expenses

Rent (₹30,000): Shared overhead — allocate pro-rata or entirely to Management:

Electricity (₹8,500): Similar pro-rata allocation.

Step 5: View Cost Centre Reports

Gateway → Reports → Statements of Accounts → Cost Centres → Cost Centre Summary

April 2025 Cost Centre Summary:

Insight for Kiran Sharma: Management costs are 58% of total overhead. If Sunrise Retail wants to grow profitably, the management cost structure (director salaries of ₹95,000) needs to eventually be supported by much higher revenue.

Cost Centre Breakeven Analysis (simple)

April Gross Profit (from sales): ₹1,10,400 (calculated in Module 25) Total overhead by department:

• Accounts: ₹32,700
• Sales: ₹29,550
• Operations: ₹15,850
• Management: ₹1,10,400

Sales department generated the revenue (₹1,10,400+ gross profit) and cost only ₹29,550 — net contribution positive. This type of analysis is why cost centres exist.

Practice Exercise

Exercise 1: In June, Sunrise Retail decides to run a promotional campaign. Expenses:

• Social media ads: ₹15,000 → Sales department
• Google ads: ₹20,000 → Sales department
• Creative design agency: ₹12,000 → Management (strategy decision)

All paid by bank. Show the Payment Voucher with cost centre allocations.

Exercise 2: How would you use cost centre data to decide whether to hire a dedicated salesperson for the HITEC City showroom? What reports would you look at?

Key Terms

Module Summary

• Cost centres enable department-wise expense tracking without maintaining separate ledgers for each department
• Setup: Enable in F11 → Create Cost Centres → Enable cost centre tracking on expense ledgers
• Sunrise Retail has 4 cost centres: Management (₹95K salary), Accounts (₹25K), Sales (₹18K), Operations (₹12K)
• During salary payment, Tally prompts for cost centre allocation — split ₹1,50,000 across 4 centres
• Cost Centre Summary report shows total cost per department — input for management decisions
• Shared expenses (rent, electricity) are allocated pro-rata based on a predetermined percentage

Quick Quiz

1. The primary purpose of cost centres in Tally is:
   • a) To track stock items by location
   • b) To track expenses by department or project
   • c) To manage customer credit limits
   • d) To calculate GST by category

2. In April, Salary of ₹18,000 for Priya (Sales) is allocated to:
   • a) Management cost centre
   • b) Accounts cost centre
   • c) Sales cost centre
   • d) No cost centre — salary is a common expense

3. Which Tally report shows the total expenditure by department?
   • a) Outstanding Receivables
   • b) Cost Centre Summary
   • c) Godown Summary
   • d) Purchase Register

4. If Sunrise Retail's Sales department cost ₹29,550 in April and generated ₹4,57,250 in invoices, the department is:
   • a) Loss-making — costs exceed revenue
   • b) Profitable — revenue far exceeds cost
   • c) Break-even
   • d) Cannot determine from this data

Next up: Module 23 — Manufacturing Journal and BOM — How Sunrise Retail assembles combo packs from individual components using Bill of Materials and Manufacturing Journals in Tally.