Decoding a Profit Center

A Profit Centre is a segment of a business, often called division that is responsible for both revenue and expenses. In a non-profit organization, the term `revenue centre’ may be used instead of profit centre’ as profit may not be the primary objective-of such an organization. In other words, a profit centre is a responsibility centre in which inputs are measured in terms of expenses and outputs are measured in terms of revenues. The expense centre, expense responsibility centre and profit centre are inter-related.

The main objective of expense centre is to effect expense control. In case of profit centre, expense control is only one of the several considerations. The scope of a profit centre is broader than that of expense centre. In a profit centre the measures of performance is boarder than that of an expense centre as in expense centre, we measure only one element, i.e., cost whereas in profit centre we measure both cost as well as revenue. Similarly, the scope of activities of profit centre is much broader than that of revenue centre because of the responsibility to produce the product more efficiently.

In a profit centre, manager has the responsibility air’ authority to make decisions that affect both costs and revenues for the department or division. In fact, the main objective of a profit centre is to earn profit. Thus, a profit centre manager aims at both the production and marketing of a product. Such a manager decides about the production policies, the price and marketing strategies. He is concerned with increasing the centre’s revenues by increasing production and/or improving distribution methods. However, such a manager does not take decision nor has control over the investment in the centre’s assets. He may make proposals for the investment in the division but the decisions about it are normally taken by the top management. A typical example of a profit centre is a division of the company that produces and undertakes marketing of different products. Thus, it is concerned both with formation of production strategy as well as marketing strategy. The main objective being to earn higher profits by pursuing such policies.

BY – DR. Prof. Rajesh Ganatra,

Ph.D., UGC NET, M.Com

SKIPS – Ahmedabad

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