HOW MANY COST CENTER LEVELS DOES YOUR COMPANY NEED?

shneor fridman
Sep 11, 2024
2 min read

As a CEO, CFO, or business owner, you’ve probably considered the question: How many cost center (CC) levels should my business have? It’s a common dilemma, particularly for companies that are growing or have complex organizational structures. The default mindset is often to add more levels, thinking more detail equals better reporting. But does it?

In my experience, multiple levels of cost centers can be both a blessing and a curse. Let’s break it down.

When Multiple CC Levels Make Sense

For large companies—especially those with multiple departments, locations, or divisions—having 3-5 cost center levels may seem necessary. For example, in governmental or fund accounting, detailed reporting is critical for tracking funds accurately across various programs. The multiple CC levels help businesses meet compliance standards and provide granular insights into departmental performance.

The Downsides of Too Many Cost Centers

However, more isn’t always better. Here’s why:

Complexity: Each additional CC level means more cells to fill. In reality, for each transaction, you may need to split entries across multiple General Journal lines to ensure the correct allocation. This isn’t just time-consuming but adds unnecessary friction to daily operations.
Risk of Error: The more levels, the higher the chance of mistakes. This is particularly true when dealing with impossible combinations of fund, program, or location codes. A small error can cause major inaccuracies in your financial reports, and the cost of correcting these mistakes can be significant.

My Experience: Streamlining Cost Centers

In one case, I worked with a company that had four cost center levels. The result? Their finance team spent hours on basic data entry, and the risk of errors was incredibly high. After reviewing their reporting needs, we simplified the system. We reduced the number of mandatory cost centers to two, and added a third, optional cost center to allow for future growth.

The benefits were immediate: