cost centres and profit centres

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Cost Centres and Profit Centres

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Page 1: Cost Centres and Profit Centres

Cost Centres and Profit Centres

Page 2: Cost Centres and Profit Centres

Content

• Cost Centres• Profit Centres• How to create them• Uses of cost / profit centres• Advantages• Disadvantages• Examples

Page 3: Cost Centres and Profit Centres

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

Page 4: Cost Centres and Profit Centres

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

Page 5: Cost Centres and Profit Centres

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

Page 6: Cost Centres and Profit Centres

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

Page 7: Cost Centres and Profit Centres

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.

Page 8: Cost Centres and Profit Centres

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

Page 9: Cost Centres and Profit Centres

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

Page 10: Cost Centres and Profit Centres

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