11 Steps for Changing a Cost Center Hierarchy

  • by Daniel Goodhart, FI/CO Consultant
  • June 15, 2005
A strong cost center hierarchy is necessary for analyzing your company's performance. If your structure is not meeting your needs, try this 11-step process to develop a new, more effective cost center hierarchy. This process is best suited for small- to medium-sized companies.
Key Concept

A company must have a logical grouping of costs to analyze the month- to-month results. To establish a strong hierarchy, keep in mind these basic cost center objectives:

  • Provide consistency in reporting.
  • Give plant organizations freedom in the way they manage their activities.
  • Reflect the activities within the organization.

I find that some companies underestimate the amount of preliminary work necessary to develop their hierarchical structures. As a result, the shortcomings of cost center and profit center hierarchies quickly become apparent. A common mistake, for example, is to omit a key part of the business from the hierarchy. This dilemma inspired me to develop an 11-step approach for small- and medium-sized companies to create a new cost center hierarchy. I would not suggest attempting this with a large company due to the complexity of interfaces and configuration changes that would be required.

Strong cost center and profit center hierarchies are necessary for results analysis. Your company must have a standard hierarchy before it can have a clearly organized reporting structure. The key is to understand the company's structure and the activities performed in your operations. The following is a list of the types of activities that occur and how cost centers could be grouped:

  • Preparing in-process or intermediate products to be placed in inventory
  • Packing (producing salable finished goods)
  • Warehouse and shipping
  • Logistics, including production planning, managing raw and packing material, releasing
    orders for materials, scheduling delivery, and managing materials to meet production demands
  • Quality assurance for raw and packing materials via sampling online and testing inside or outside the organization
  • Human resources
  • Purchasing
  • Information systems
  • Maintenance
  • Administration
  • Finance and accounting

Daniel Goodhart

Daniel Goodhart has been a manufacturing accounting professional for the past 18 years. He has two BS degrees in accounting and information processing systems. Daniel has worked with SAP since 1996. He’s traveled in North America, Costa Rica, Japan, and Belgium, implementing and troubleshooting issues in FI/CO, Product Costing, CO-PA, and maintenance order costing. Daniel has given many training and speaking engagements promoting the attributes of SAP. You can visit his Web site at www.daniel-goodhart.com.

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