Aims For Today

Appreciate the differences between Cost Centres and Profit Centres Review Direct and Indirect Costs Analyse the advantages and disadvantages of Cost Centres and Profit Centres

Budget Definition
A forward financial plan usually involving a cash-flow forecast, forecast sales and forecast costs. The budget should be set in light of the companies objectives, and for a defined period.

Cost Centre Definition

A department or section of an organisation to which specific costs can be allocated.

Profit Centre Definition

A division or department of a company that 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 the allocation of costs

Use of Cost & Profit Centres

Accounting - Better analysis of individual performances & speedier corrective action Organisational ID which areas are working well and improve decision making Motivational Encourages middle managers to make their division the most profitable.

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 the firm

Direct Costs

A cost that can be linked completely to a specific product or area of operation. They vary in 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

Indirect Costs

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

Advantages
1.

2.

3.
4.

Some control delegated to local levels which can be motivating Success and failures of individual departments can be identified clearly Problems can be traced more easily Decision making is improved, e.g. setting prices

Disadvantages
1.

2.

3. 4.

Parts of the firm can put themselves before the business as a whole Reasons for good or bad performance may be external to the cost centre, & out of its control May create pressure on managers Not all costs can be associated directly with a particular part of the firm

Allocating Costs / Overheads

A firm decides how to allocate overheads between different parts of the business Different overheads will be allocated in different ways

Evenly between products In the ratio of output In the ratio of floor space

Recap

A cost centre is.? The essential difference between a cost centre and a profit centre is? 2 Advantages of cost and profit centres are?

Recap

2 Disadvantages of cost and profit centres are? A direct cost is a?

3 Examples of direct costs are...?

Recap

An Indirect cost is?

3 Examples of indirect costs are..?

Homework
Read BR articles! Page 203: Question B Revision Exercise: B1 Data Response

THINK: What are the specific features of dot.com businesses??