Profit and cost centres analysis in a local Gozitan SME

Abstract

The Maltese market is made up mainly of SMEs. Within this context the Gozitan industry, in particular is characterised by a smaller economy in which none of the enterprises can be classified as large, under the thresholds of the Companies Act 1995. The need to study the application of Profit and Cost Centre Analysis in the Gozitan SMEs has long been felt. This dissertation investigated mainly whether a random sample of Gozitan SMEs is performing Profit and Cost Centre Analysis as well as applying these principles to a particular company and examining whether each separate centre is making a profit or a loss and then analysing the profitability and performance of this company's respective centres. The results of the research showed that there is almost absolute parity as to whether Gozitan SMEs are applying Profit and Cost Centre Analysis. The results showed that there was application of these analyses by all the firms employing more than 20 employees and which have been in operation for less than two years. Cost/Profit centres are mostly established by type of business. Another point, which came out from this study, is the different extent of analyses, some declaring that they only segment income whilst others go to the extent of apportioning the general overheads. The researcher then applied Profit and Cost Centre Analysis to a particular Gozitan SME. A Profit and Loss statement was prepared for each centre where the cost of sales was reduced from the income receivable to arrive at the gross profit. Expenses were separated into allocated and apportioned and were deducted from gross profit to arrive at the net centre's profit or loss. These statements were then analysed taking into consideration, where relevant, non accounting information. The main recommendation of this study is to encourage the SMEs to apply Profit and Cost Centre Analysis by showing them what are the advantages of their application. It has also been derived from the research, that there is a need for information and technical courses about the techniques of Profit and Cost Centre Analysis.