Common problems in the performance measurement of profit and cost centres

The interaction of the measurements of cost centres and profit centres, and the resultant effect on an organisation´s profit is examined by applying the Theory of Constraints thinking processes. Two cases are described based on the measurements that a profit centre should maximize profit and a cost centre should at least recover its costs. These cases illustrate that some outsourcing decisions taken in isolation can lead to a spiral of declining competitiveness; and that the attempts by a cost centre to maximise cost recovery leads to a lower profit for the organisation. The thinking process logic shows that these negative effects are caused by the application of wrong measurement criteria.