See 3.9 Difference between cost and profit centres for what profit/cost centres are
PROFIT = revenue - total costs for some period of time If costs are greater than revenue your company is in loss
WHY WE LIKE PROFITS
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incentive to produce
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reward for risk taker
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encourages invention and innovation
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is an indicator of growth or decline
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INTERNAL SOURCE OF FINANCE
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non profit companies want a financial surplus.
you can remember the roles of cost and profit centres with MAMA M: Monitoring and control A: Autonomy M: Motivating A: Accountability
- MEANS a company is able to operate effectively and make informed decisions
LIMITATIONS
- unhealthy competition between different departments inside a business
- loss of control: if profit/cost centres control their money, managers get less control
- Subjectivity: how to run cost/profit centres may make people have arguments (oh no)
- Short-termism: encourages managers to think short term. You lose the long term vision of a business, and may neglect spending money on HR or R&D
