What is Cost Center?
A cost center is a department or unit whose manager is responsible only for the costs incurred, not for revenues or capital. Examples include HR, IT, finance, and maintenance. Performance is evaluated by comparing actual costs to the budget, looking at favourable or unfavourable variances.
How It Works
- Define the cost centre boundary and assign a manager.
- Set a cost budget covering personnel, supplies, and allocated overheads.
- Capture actual costs through the GL using cost centre codes.
- Compute variances each month and require explanations for material differences.
Saudi Context
Saudi government entities, family-owned groups, and Tadawul-listed companies all use cost centre reporting for back-office functions. Cost centres are often labelled with department codes that match the Saudi labour authority’s GOSI categorisation for workforce reporting.
Example
The IT department of a Saudi group is a cost centre with a SAR 3 million annual budget. Actual cost ends at SAR 2.85 million, a SAR 150,000 favourable variance attributed to delayed cloud upgrades.