IBBusinessDPBusiness ManagementHLRevision Notes3. Finance & Accounts3.9 BudgetsCost & Profit Centres

Cost & Profit Centres (DP IB Business Management)

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Lisa Eades

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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

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

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

Cost and profit Centres help improve organisation and control, support budget autonomy and accountability and can improve motivation
Cost and profit centres help improve organisation and control, support budget autonomy and accountability and can improve motivation

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

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

Exam Tip

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

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Lisa Eades

Author: Lisa Eades

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.