Cost & Profit Centres (DP IB Business Management)

An Introduction to Cost & Profit Centres

• Tracking costs and revenues becomes more complex as a business grows

• Cost and profit centres classify different parts of a business based on their financial performance

Cost Centres & Profit Centres

The Roles of Cost & Profit Centres

• Multi-location businesses use cost centres and profit centres to measure and improve their financial management

  • High-performing functions or business units can be identified and rewarded

  • Low-performing functions can be monitored closely

• Cost centres and profit centres therefore fulfil a number of important roles

Diagram: the main roles of cost & profit centres

Organisation and control

• Managers can set and monitor budgets for different sections of the business

• Performance can be analysed and compared over time

Budget autonomy

• Budget holders can make their own financial decisions without the need to consult business leaders

• Focused decisions can be made quickly

Accountability

• Budget holders' performance can be measured against their management of costs and revenues

• Can support the appraisal processes

Motivation

• Delegation of budgets can drive budget holders to make effective financial decisions

• Good performance can be recognised and rewarded

Advantages & Disadvantages of Cost & Profit Centres

• The advantages and disadvantages of cost and profit centres can vary according to the size and type of business

• Multi-unit businesses, those with numerous product lines and complex businesses may benefit extensively from using cost and/or profit centres

Advantages & Disadvantages of Cost and Profit Centres