A profit centre is a segment of a business, often called a division, that is responsible for both revenue and expenses. In a non-profit organization, the term `revenue center” may be used instead of “profit center” 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 the expense centre is to effect expense control. In the case of a profit centre, expense control is only one of the several considerations. The scope of a profit centre is broader than that of an expense centre. In a profit center, the measures of performance are boarder than in an expense center, as in an expense centre, we measure only one element, i.e., cost, whereas in a profit center, we measure both cost as well as revenue. Similarly, the scope of activities of a profit centre is much broader than that of a revenue centre because of the responsibility to produce the product more efficiently.
In a profit center, the manager has the responsibility and 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 a profit. Thus, a profit centre manager aims at both the production and marketing of a product. Such a manager decides on the production policies, prices, 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 decisions or have control over the investment in the centre’s assets. He may make proposals for investment in the division, but the decisions about it are normally taken by the pgdm colleges in ahmedabad. 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 the formation of a production strategy as well as marketing strategy. The main objective is to earn higher profits by pursuing such policies.
By—Dr. Prof. Rajesh Ganatra,
Ph.D., UGC NET, M.Com
