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COST CENTER , PROFIT CENTER, COST UNIT , COST DRIVERS

GEETANJALI GOEL 59

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Responsibility Centers
A responsibility center is an activity, such as a department, that a manager controls.
Types of Responsibility Centers

Cost centers Revenue centers Profit centers Investment centers

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COST CENTER A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company.

Eg. research and development, marketing and customer service.

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There are some significant advantages to classifying simple, straightforward divisions as cost centres, since cost is easy to measure. Because the cost centre has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut.

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PROFIT CENTER A business unit or department which is treated as a distinct entity enabling revenues and expenses to be determined so that profitability can be measured.
A profit center manager is held accountable for both

revenues, and costs (expenses), and therefore, profits.

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What this means in terms of managerial responsibilities is that the manager has to drive the sales revenue generating activities which leads to cash inflows and at the same time control the cost (cash outflows) causing activities. This makes the profit center management more challenging than cost center management

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COST CENTER VS PROFIT CENTER

Cost centres are the smallest segment of activity or area of responsibility for which costs are accumulated or ascertained. Where as profit centres are that segment of activity which is both responsible for Revenue and expenses and disclose profit of a particular segment of activity.
Cost centres are created for accounting convenience, where as profit centres are created to delegate responsibility to individuals. There may be number of cost centres in a profit centre. All profit centres are cost centres but all cost centres are not profit centres.

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Responsibility Reports for Cost Centers

Current Month Year to Date Over Over (Under) Budget (Under)

Budget
Report to Supervisor of Work Station 106Drill Press

Materials $ 3,200 $(80 ) $ 12,760 $ 110 Direct labor 14,200 170 87,300 880 Supervision 1,100 (50 ) 4,140 (78 ) Power, supplies, miscellaneous 910 24 3,420 92 Totals $19,410 $ 64 $107,620 $1,004 Report to Supervisor of Fabrication Department

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Responsibility Reports for Profit Centers (000s)

Current Month Year to Date Over Over Budget (Under) Budget (Under) $122.0 $ 47.5 12.2 $ 59.7 $ 62.3 36.0 $ 26.3 $ 1.5 $ 2.8 1.8 $ 4.6 $ (3.1 ) $ (1.2 ) $ (1.9 ) $387.0 $ 3.2

Report to Product Manager Appliances, European Region Sales Variable costs: Production Selling and administrative Total variable costs Contribution margin Direct fixed costs Product margin

$150.7 $ 5.9 38.7 1.9 $189.4 $ 7.8 $197.6 $(4.6 ) 98.5 (3.1 ) $ 99.1 $ (1.5 )

To report to manageEuropean Region