3.9 Budgets

Question 1

Cost centre?

Answer 1

a division of a business that has responsibility for its own operational costs

Question 2

Examples of cost centre (4)

Answer 2

1. administration
2. customer service
3. HR
4. Legal

Question 3

Cost/profit centre organised by (3)

Answer 3

1. Function - based on different functional departments, hr, finance, marking, operations
2. Product - produces a range of goods and service, to ensue that each product is accountable for its own cost
3. Geography - large business with multiple outlets in the country or overseas

Question 4

Profit centre?

Answer 4

a division of a business that has responsibility for both cost and revenue generated within a department

Question 5

Example of cost centre

Answer 5

1. Chain stores

Question 6

The roles of cost/profit centre (4)

Answer 6

• Monitoring and control - that use cost and profit centres do son in order to have better control of different parts of their operations. Enables benchmarking (business compares its performance and practices with those of top competitors)
• Autonomy - budget holders are empowered to make decisions for their respective cost and profit centres. Make budget holders more aware of the realities and needs of the department
• Motivating - motivate these people to make better decisions for the organisation. The managers can be awarded who operated efficiently
• Accountability - makes managers and budget holders accountable for their actions and responsibilities

Question 7

Limitation of using cost and profit centre (4)

Answer 7

• Unhealthy competition - between the departments of the organisation. As managers may hide info and be uncooperative
• Loss of control - senior executives may lose some degree of control as the managers of the cost and profit centre are empowered to oversee the operational and revenue cost of their departments
• Subjectivity - must allocate the firms fixed costs between various centre, subjective as how much rent should each department pay?
• Short termism - encourage managers to take short term approach at the expense of long term profits