1) Cost Centres
When the manager is held accountable only for costs incurred in a responsibility centre, it iscalled a cost centre. It is the inputs and not outputs that are measured in terms of money. In a costcentre records only costs incurred by the centre/unit/division, but the revenues earned (output)are excluded form its purview. It means that a cost centre is a segment whose financial performance is measured in terms of cost without taking into consideration its attainments interms of “output”. The costs are the planning and control data in cost canters. The performanceof the managers is evaluated by comparing the costs incurred with the budgeted costs. Themanagement focuses on the cost variances for ensuring proper control. A cost centre does notserve the purpose of measuring the performance of the responsibility centre, since it ignores theoutput (revenues) measured in terms of money. For example, common feature of productiondepartment is that there are usually multiple product units. There must be some common basis toaggregate the dissimilar products to arrive at the overall output of the responsibility centre. If thisis not done, the efficiency and effectiveness of the responsibility centre cannot be measure.
2) Profit Centres
When the manager is held responsible for both Costs (inputs) and Revenues (output) it is called a profit centre. In a profit centre, both inputs and outputs are measured in terms of money. Thedifference between revenues and costs represents profit. The term “revenue” is used in a differentsense altogether. According to generally accepted principles of accounting, revenues arerecognized only when sales are made to external customers. For evaluating the performance of a profit centre, the revenue represents a monetary measure of output arising from a profit centreduring a given period, irrespective of whether the revenue is realized or not.The relevant profit to facilitate the evaluation of performance of a profit centre is the pre–tax profit. The profit of all the departments so calculated will not necessarily be equivalent to the profit of the entire organization. The variance will arise because costs which are not attributableto any single department are excluded from the computation of the department’s profits and the