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   Appreciate the differences between

Cost Centres and Profit Centres

Review Direct and Indirect Costs

 Analyse the advantages and

disadvantages of Cost Centres andProfit Centres

 Aims For Today

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Budget Definition

 A forward financial plan usuallyinvolving a cash-flow forecast,forecast sales and forecast costs.

The budget should be set in light of 

the companies objectives, and for adefined period.

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Cost Centre Definition

 A department or section of anorganisation to which specificcosts can be allocated.

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Profit Centre Definition

 A division or department of a companythat has been given authority to run itself within the business with its own profit and loss account.

 A profit centre must be able to generate

revenue, as well as be a centre for theallocation of costs

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Use of Cost & Profit Centres

 Accounting - Better analysis of individualperformances & speedier corrective action

Organisational  – ID which areas areworking well and improve decision making

Motivational  – Encourages middlemanagers to make their division the mostprofitable.

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Establishing Cost & Profit Centres

 Vary according to circumstances May be… 

 A product   A group of machines  A department  A location  A person

The choice must be appropriate to thefirm

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Direct Costs

 A cost that can be linked completely to aspecific product or area of operation. They varyin direct proportion to activity or output

Common Direct Costs: Wages of factory labour

Materials

Component parts Depreciation of SPECIALIST machines

Marketing specific to ONE product

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Indirect Costs

 A cost that is general to some or all of the areas of thebusiness

Common Indirect Costs:

Supervisors’ / managers’ wages  Running service departments e.g. personnel

Heating and Lighting

Depreciation of GENERAL machinery

 Administration costs GENERAL marketing

Running expenses e.g. telephone / rent

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 Advantages

1. Some control delegated to local levelswhich can be motivating

2. Success and failures of individual departments can be identified clearly

3. Problems can be traced more easily

4. Decision making is improved, e.g.setting prices

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Disadvantages

1. Parts of the firm can put themselves before the business as a whole

2.

Reasons for good or bad performancemay be external to the cost centre, & out of  its control

3. May create pressure on managers 

4. Not all costs can be associated directly with a particular part of the firm

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 Allocating Costs / Overheads

 A firm decides how to allocate overheadsbetween different parts of the business

Different overheads will be allocated indifferent ways

Evenly between products In the ratio of output

In the ratio of floor space

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 A cost centre is….? 

The essential difference between acost centre and a profit centre is…? 

2 Advantages of cost and profit centresare…? 

Recap

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2 Disadvantages of cost and profitcentres are…? 

 A direct cost is a…? 

3 Examples of direct costs are...?

Recap

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 An Indirect cost is…? 

3 Examples of indirect costs are..?

Recap

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Read BR articles!

Page 203: Question B Revision

Exercise: B1 Data Response 

THINK: What are the specific 

features of dot.com businesses…??  

Homework