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