Distinguishing Between Cost Centers and Projects

After completing this lesson, you will be able to:

After completing this lesson, you will be able to:

  • Discuss when to use overhead projects versus cost centers

Cost Centers Versus Overhead Projects

You need to know the difference between cost centers and projects in order to advise when to use overhead projects.

Explaining the Use Cases

From a management accounting perspective, the departments are represented by cost centers in a vertical approach. Each cost center is assigned to the person responsible – the manager. This person is accountable for all costs incurred in their area of responsibility. Costs can also be planned so that you can compare the actual expenses with the planned values for each cost center. This enables you to analyze where your cost center has caused less (or more) costs than expected.

For example, if you want to follow-up the costs linked to the activity of the Real Estate Department (salaries of employees of the department, rents paid for the company’s building, cleaning and general maintenance, and so on), you will use a cost center as a cost assignment and then compare actual and plan data.

When costs and revenues need to be followed up with a more horizontal approach, you should prefer to track costs and revenues by project. Often it makes sense to break the work of this project into multiple separate tasks and to set up a hierarchy for them: a transverse work breakdown structure element (WBS element).

The video will guide you through a scenario with and without the use of projects:

Log in to track your progress & complete quizzes