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circumstances profit centres can be developed on a geographical basis. High street banks, for
example, expect branches (or groups of branches) to achieve agreed levels of profits.
2 In manufacturing it is possible to operate smaller cost or profit centres relating to a particular
product or even a single production line.
3 A relatively simple approach is to use departments or divisions as cost or profit centres.
Hospitals use wards and individual departments such as X-ray to develop cost and profit
centres, for example.
4 Profit and cost centres can also relate to individual products or brands.

The roles of cost and profit centres (AO2)

There are three broad roles for cost and profit centres.

1 Financial roles
Businesses gain more detailed information from running a number of separate cost and profit
centres, rather than merging all the figures into a single set of financial statements. Having
separate cost centres allows managers to compare the costs incurred by various parts of the
business. This enables managers to identify the less cost-efficient parts of the business. Senior
managers can then attempt to reduce costs in this area, perhaps through more training of staff,
creating a more profitable business. Cost centres can also play a part in setting prices – once the
cost is known it is possible to set a price to make sure that the brand, product or division earns
a profit.
There is another side to this. Those aspects of the business which have the lowest costs, or are
most profitable, may be able to provide support, advice and training to areas performing less
effectively.

2 Organizational roles
The financial data provided by cost and profit centres gives managers more in-depth information
about the operation of their business. Using this information managers might be able to organize
the business more effectively, leading to higher profits.
For example, many businesses are made up of a number of separate elements. If a business wishes
to expand, then having information on the relative financial performance of each of the divisions
of the business will be helpful.
Businesses can also use information from cost or profit centres in other ways. Some part of
employees’ pay may be linked to the success of the division, department or branch in keeping
costs down, or in achieving profit targets. Managers may also use this information in setting
targets for all employees, possibly as part of their appraisal scheme.

3 Motivational roles
Many psychologists recognize that giving people greater responsibility is an effective way
to motivate them. This responsibility can take the form of achieving cost or profit targets
within cost or profit centres. Businesses have increasingly recognized this and have sought to
allow employees a greater role in managing budgets. When managing a profit or cost centre,
employees have more varied and interesting jobs as well as the satisfaction of achieving cost
or profit targets.

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