cost centres and profit centres
DESCRIPTION
cost centers for pgdm studentdsTRANSCRIPT
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