Profit center is a segment of an organization where costs are incurred and revenues are earned. It is therefore accountable for the profitability of the segment.
In terms of responsibility and accountability, profit centers are one level above cost centers. A profit center is likely to be major business unit or segment, and several cost centers are likely to be a part of a single profit center. Manager of a profit center is likely to be an experienced professional who has far more responsibility than a manager of a cost center. He has the authority to make policies related to revenues and costs, and has the responsibility to maximize profits of his business unit for the benefit of the organization.
Higher management of an organization keeps a keen eye on the performance of profit centers. Performance is usually evaluated by comparing the profits earned:
- with the budgeted profits,
- with profits of other profit centers, or
- industry average profits.
This helps the higher management in making key-decisions on timely basis, such as:
- How to improve any loss making or low profit-making division.
- Whether to discontinue any loss-making division.
- Whether any additional resources are needed at any profit center to lift the performance.
- Whether to provide further resources to a profit center showing signs of growth etc.
Examples of profit centers
- A retail shop of an organization having chain of retail shops.
- A product line earning revenues and costs independently, for example, an automobile having 3 profit centers dealing in motor bikes, cars and trucks.
- A regional office of an organization having different regional offices in a country.
- A country office of a multinational business.