PROFIT AND COST CENTERS

Question 1

Profit Centers

Answer 1

Section of a business where both costs and revenues are identified and recorded. Allows to calculate how much profit each center makes, to judge the performance of the various sectors of the business.

Question 2

Cost Centers

Answer 2

Section of the business where costs are incurred and recorded. Can help managers collect and use cost data effectively.

Can be divided in the following ways (Profit centers aswell):
- By department: Finance, production, marketing..
- By product
- By geographical location

Question 3

Advantages

Answer 3

• Aids decision making: Whether to continue or discountinue a product.
• Better accountability: Help hold specific business sections accountable. Example managers who perform poorly.
• Benchmarking: Through comparing performance in different centers a business can identify the least efficient areas and act accordingly to improve the efficiency of the business.

Question 4

Disadvantages

Answer 4

• Indirect cost allocation: Difficult to allocate to specific cost centers. If allocated poorly, it can distort the overall business performance.
• External factors beyond the control of the business can affect cost and profit centers differently.
• Staff stress. The pressure of managing the centers might be too high for managers especially if they lack the right skills. This can lead to staff demotivation.