Cost & Profit Centres (DP IB Business Management)

Revision Note

Written by: Lisa Eades

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

Type	Definition	Explanation
Cost Centre	Business units or departments that are responsible for incurring costs but do not generate revenue	Cost centres track and manage expenses Managers can be held accountable for controlling costs Examples include functions such as Human resources Administration IT Support
Profit Centre	Business units or departments that generate revenue and incur costs	Profit centres are expected to cover their costs and make a profit in their own right Managers are fully accountable for their overall financial performance Examples include units such as Sales departments or regions Specific product lines Retail outlets

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

Budget holders can make their own financial decisions without the need to consult business leaders
Focused decisions can be made quickly

Budget holders' performance can be measured against their management of costs and revenues
Can support the appraisal processes

Delegation of budgets can drive budget holders to make effective financial decisions
Good performance can be recognised and rewarded

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

Advantages	Disadvantages
Can assess the performance of individual parts of the business Managers can concentrate efforts on poor-performing areas Rewards for good performance can be targeted	May cause rivalry between different departments/units Negative impact on professional relationships 'Win at all costs' culture may affect quality/customer service
Allows financial decisions to be made at a local level Prices can be set according to local market conditions Effective control of costs by those given responsibility to actually spend business money	Not always straightforward to separate or allocate costs/revenues Businesses with multiple product lines may not be able to accurately allocate costs between them
Allows for delegation of financial decision-making Increased responsibility can motivate lower-level employees Increases the diversity/interest of job roles	Requires financial skills and training Extra demands alongside a manager's core role Training requires investment/time away from work

Many large businesses operate both cost and profit centres

Supermarket retailers such as Carrefour and Aldi operate profit centres for individual or groups of stores
They also operate cost centres for their head office functions such as Human Resources and Marketing

Last updated: 29 October 2024

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