What metrics would be appropriate for each scenario, cost profit and profit center? Describe when an...

What metrics would be appropriate for each scenario, cost profit and profit center?

Describe when an activity should be considered a cost center and when it should be considered a profit center.

B) What metrics would be appropriate for each scenario (cost center; profit center)?

Need help with B.

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Expert Solution

While choosing the metrics for each scenario, we should take care of the basic reason for which cost centre and profit centre are recognised for. These are:

1. The basic difference is the Cost centre is a department of a company which takes care of the costs whereas the Profit centre is a subunit of a business which is responsible for profits.

2. The cost centre is responsible for cost control and cost reduction whereas the Profit centre is responsible for Maximizing revenues and profits.

3. The area of influence of cost centre is narrow whereas the area of influence of the Profit centre is wide.

4. Type of work in cost centre is simple as it only influences the cost whereas the area of influence of the Profit centre is complex as it takes care of both profits as well as cost.

5. Cost centre does not generate profit in its own whereas the profit centre do.

6. Example of a cost centre is 'Customer service Facility' and profit centre is 'Sales Division'.

ekkarill92 answered 1 year ago

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