Cost & Profit Centres (HL IB Business Management)

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

• 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