Organize a company's operations by activity. For example, a production department will use resources. All activities within the department should relate to the cost center; no profit center activities should remain here.
Businesses typically have different components under their umbrella. Cost centers and profit centers are two major divisions in a business. A cost center contains activities that only relate to costs. This subunit usually works with materials or labor necessary to convert resources into products. Hospitals, for example, have cost centers that include food service and laundries. Profit centers deal with activities that include both revenues and expenses. A reservation center or fast food restaurant is a common example of profit centers. Companies can reorganize business costs into a profit center.
Assign an individual to act as a responsibility manager. Each responsibility manager has the opportunity to direct all activities under his direction. Managers should be able to remove costs that do not directly influence their centers.
Start activities that will result in revenue for the profit center. An essential part of a profit center is to generate profits from sales. Organizing business costs must provide an outlet for selling goods or services to consumers.
Prepare profit and loss statements on a periodic basis, such as every month. A responsibility manager must report profit through financial reporting. Accounting rules dictate that all business costs match the revenues earned in the profit center.
Remove costs that do not bring about value to the profit center. If the costs are necessary to the business, consider shifting them to a related cost center or set up another cost center for these activities.
Tips & Warnings
- Major organizational restructuring may require an overhaul of the company's structure. Companies may need to shift from a functional organizational structure to a matrix structure, or vice versa, to set up profit centers.
- "Cost Management: Strategies for Business Decisions"; Ronald Hilton, et al.; 2006
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