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Cost Centres and Profit Centres

Content
• Cost Centres
• Profit Centres
• How to create them
• Uses of cost / profit centres
• Advantages
• Disadvantages
• Examples
Definitions
• Cost centre – An identifiable part of an organisation
where costs can be calculated
• Profit centre – An identifiable part of an organisation
where costs and revenue can be calculated
Cost and Profit Centres
• You need to be able to allocate all costs to a certain
area
• If you can calculate revenues as well as costs can
calculate profit (Total revenues- total costs)
• These are often used with budgets to assist with
financial planning and control
Creating cost and profit centres
• Cost / profit centres can be created in a number of
ways:
• Geographically e.g high street banks
• Product / line of production
• Departments / divisions
• Individual products / brands
Uses of Cost and Profit Centres
• They allow the business to compare performance
between departments / across products / brands etc
• This allows the business to make decisions about
underperforming areas
• If a profit centre is identified as doing well
businesses may want to focus on the reasons
behind this
Uses Of Cost / Profit Centres
• They allow a more focused study of a firms finances
• Benchmarking can take place
• Responsibility for a profit / cost centre will motivate the
individual responsible
• By placing responsibility with the person involved in the
activity the finances may be run more efficiently than would
be the case if a more remote, senior manager controlled it.
Why operate cost and profit centres?
• Financial reasons – they allow you to manage and
control money. They allow the business to identify
which areas are most profitable
• Organisational reasons – helps with the
organisation of departments and resources
• Motivational reasons – motivates managers and
workers
Disadvantages of cost / profit centres
• In practice, it may be difficult to allocate costs to a
particular division / centre
• Cost and profit centres may add to pressures and
stress on staff
• Senior managers may be unable to recognise
whether a cost or profit centre is running effectively
/ ineffectively
Summary
• Cost Centres – calculate costs attributed to a specific area
of the business
• Profit Centres – calculate costs and revenues attributed to
a specific area of the business
• Ways to generate them: by geographical area, product,
brand ,department
• Uses of cost / profit centres – they have financial,
motivational and organisational uses
• Advantages – helps control money, motivates staff
• Disadvantages – can be difficult to do, may increase
pressure