Cost Centres and Profit Centres

Cost centres and profit centres are specific parts of organisations which are created in order to exert budgetary control in a practical manner on that organisation. A cost centre is a department for which costs can be solely calculated, whereas a profit centre is allocated responsibility for revenue and costs and hence is able to calculate overall profit.

Advantages of Cost/Profit centres

Disadvantages of Cost/ profit centres.

The efficiency of all aspects of a company can be more closely monitored through use of cost and profit centres.   The delegation of power which takes place when making staff responsible for cost and profit centres is an excellent way to boost morale.   Efficient Cost and profit centres make for good examples of how efficiency can improve the financial position of a firm.

Costs and Revenues may be hard to allocate accurately to cost and profit centres hence making the data from the centres less reliable and in turn less useful.   De-motivation may be caused if staff are not comfortable with lots of figures. This problem can be solved but would involve expensive training courses for large numbers of staff.   Cost and Profit centres may not be particularly cost effective in themselves but it is hard to keep track on exactly how efficient they really are.

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance Analysis

The final aspect of the course which you will need to be familiar with for the exam is what is known as variance analysis. Variance analysis is something which staff in a profit or cost centre would need to use when analysing the budgets for their company. Variance is basically the difference between forecasted financial targets and actual outcomes. Variance can be good (FAV) or bad (ADV) short for favourable and adverse respectively. If asked to annotate a profit/loss account you must remember these two terms as they are the only terms you are allowed to use to represent whether a company has made a profit or a loss. Remembering FAV and ADV will allow you to pick up some easy marks if this sort of question were to come up.

 

That’s it for Business Studies Module 1 well done and good luck in your exam, hope I’ve helped to clarify the major aspects of this topic for you all.