Thursday, March 22, 2012

Cost Centers in TUHUND – Cost Accounting Made Easy

Just like rest of the modules in TUHUND, cost center accounting is very simple and you do not have to be a finance expert to work with it. Typically cost center accounting is more basic than management accounting and it does not have to be directly linked to the financial statements. However, some companies do link them. While most of the ERP systems available provide one of the two methods, TUHUND Accounting and Finance module gives you both the options. You may use any one or a combination of both.

Traditional definitions of cost centers use technical jargon while we always try and avoid that. In plain English cost center management has two purposes. On one hand it helps an organization with optimum utilization of funds and to eventually cut down on the costs and on the other it helps determine actual cost of products thus giving an input for the planning of selling price. With TUHUND Accounting and Finance module, at any point of time, users authenticated to work with cost centers can get the reports that can be elaborated and expanded along various axes. You can check the actual transactions, costs under various heads or periodic reports like yearly, quarterly, monthly, weekly and daily. You can even generate reports for groups of cost centers and categorize cost centers. You can even set warnings and triggers.

TUHUND Financial cost accounting reports are generated at run time. That means if you remove a particular account from a cost center, all previous transactions will also be removed as they will shift under new cost center or not considered a cost big enough to be monitored. Therefore, it is not necessary to create cost centers before transactions are made. This is better way of managing cost centers but has a drawback. You will eventually end up creating too many accounts, your trial balance will have more number of records and the schedules for your balance sheets will be longer. Otherwise, this method gives you reports that have legal validity and match cent to cent with your financial reports. If you are into a business where number of customers and vendors is not very large, you should go for this approach. Once again, if this approach suits only a part of the organization like a business entity, few entities, a branch or few branches, you may adopt it for such entities or branches only. Even for a particular branch you can close to adopt a mix of both approaches.

In the management cost accounting approach, cost centers will have to be defined first and accounts attributing to the cost assigned to each cost center. Percentage of transaction under an account for each cost center can be defined in advance and the respective value will be pre-populated at run time. However, the value can be changed. Let me explain that with an example.

Suppose you have a factory defined as a branch under TUHUND and there are two CNC machines in the factory. Your average monthly electric bill has been $1000 so far and you know that out of $1000 machine A consumes power worth $600, machine B consumes $300 and remaining $100 is consumed by lighting and other electric appliances. You have a cost center named cost of running A and other cost center named cost of running B. Besides other accounts attributing to the two cost centers, Electric bill attributes 60% and 30% to the two cost centers respectively. Suppose for a particular month you receive a bill of $2000. When you select the electric expense account under the debit side in the form, all the cost centers affected by the transaction will automatically appear below the transaction. In this case we have defined only two cost centers so only two will appear. These will be pre-populated with values $1200 and $600 respectively. You will be free to correct the values. Suppose you know that you had a big order to deliver and that only machine A had to run 20 hours a day while machine B continued to run only 8 hours a day for the entire month. You will have to change the values accordingly, which in this case will be $1500 and $300 respectively.

Though normally you can create as many cost centers as you like and under as many categories as you like, several modules like Project Management module auto create cost centers automatically. It might sound "not so big" but it actually saves a lot of time.

So for those who say cost accounting is complicated, expensive and unnecessary, there is a news. With TUHUND Accounting and Finance module, cost accounting is neither complicated nor expensive. As far as being necessary or unnecessary is concerned, you can decide that. After all, whether you make a profit or not is a matter of choice. Your Choice! :)

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