Profit center definition
/What is a Profit Center?
A profit center is a business unit or department within an organization that generates revenues and profits or losses. Management closely monitors the results of profit centers, since these entities are the key drivers of the total results of the parent entity. Management typically uses profit center results to decide whether to allocate additional funding to them, and also whether to shut down low-performing units. The manager of a profit center usually has the authority to make decisions regarding how to earn revenue and which expenses to incur.
Profit Center Presentation
Profit centers may be included in the segment reporting of a publicly-held entity. Privately-held businesses do not have to report this information as part of their financial statements.
Profit Centers vs. Cost Centers and Investment Centers
Other types of reporting entities within a business are the cost center and investment center. A cost center is only responsible for its costs, while an investment center is responsible for its return on assets. In terms of responsibility level, the profit center lies between the cost center and responsibility center.
Example of a Profit Center
The engine repair shop of the Middlesex Utility Commission is currently reported on as a cost center, which means that management only sees reports that itemize the costs incurred by this group. There is a management restructuring, and the new general manager decides to convert the repair shop into a profit center. He does this by opening up the repair shop for outside work, where it can now bid on engine repair work with local companies. As a result, the first profit center report for the shop shows $10,000 of revenues and $120,000 of costs, while three months later, the report shows $30,000 of revenues and the same $120,000 of costs. The general manager does not care if the shop always loses money, since it is also servicing in-house work - the main point is to drive down its overall costs to the Commission by bringing in outside work.