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A cost center is an area of responsibility to which costs can be allocated. A profit center is an area of a business for which both costs and revenue can be identified.

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Introduction

Cost Centres progress questions page 135 A cost center is an area of responsibility to which costs can be allocated. A profit center is an area of a business for which both costs and revenue can be identified. Business might decide to operate cost centres rather than profit centres when certain departments are impossible to calculate revenue like accounts where they are charged separately for their service. It can also be convenient for organisations that do not earn revenue (e.g. town council). Cost centres aim to monitor and control costs that can be compared with other areas of the business. The ways the a profit center can be divided up can be according to: Product- The business can divide according to their several differentiated products. ...read more.

Middle

It also gives in-depth information about the operation of the business so that targets can be established for improvements. The benefits that employees may receive due to cost and profit centres are: the cost and revenue can act as motivators so control can be delegated and can get higher pay by keeping cost down or achieving profit targets. The extra responsibility may improve performance through the diverse and varied work, and learn more skills as a result. This may bring job satisfaction when the employee reaches their target. A business may improve their pricing policy through cost and profit centres by analyzing all the costs in each product. The appropriate decision can be made as to price their product in which profit can be made. ...read more.

Conclusion

The difficulties of dividing costs in cost centres are which techniques to use. Full costing is when costs are allocated according to the output the center produces. It can also be inaccurately distributed like a two person department pays the same costs of a ten person department. Also not all the costs can be directly associated with the centre, for example admin. It is impossible to allocate fixed costs evenly as others may use the areas of one department. Cost centres may be inappropriate when the firm only produces a single product as comparisons cannot be made and focusing on the costs is more time consuming that can be spent on other targets. It also applies to a firm that has unskilled workers as costs can be higher than anticipated and the output level does not reflect the performance of the employee. ...read more.

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