Profit Center

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Summary

What is a Profit Center? Meaning.

In a Profit Center, both inputs and outputs are measured in monetary terms. Managers of these units are typically evaluated on measures that relate expenses (monetary inputs) to revenues (monetary outputs), such as operating profit or gross margin. This is fine as long as the accounting profits are consistent with the underlying cash flows. Profit centers are autonomous organizational units or departments designated as a separate entity with decision-making capabilities to affect both revenue-making and expenses processes. Often, profit centers are composed of several cost centers, expense centers and revenue centers.


Organizational issues that are highly related to autonomous profit centers are:

  1. Allocation of corporate overhead costs. Who gets to pay what?

  2. Transfer Pricing.

  3. Cannibalization by one profit center of another.

  4. Centralization and Decentralization.

Typical examples of these organizational entities are large Stores, National Branches, Divisions or Strategic Business Units of large corporations.


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Compare with: Strategic Business Unit  |  Economic Value Added  |  Investment Center  |  Cost Center  |  Revenue Center  |  Expense Center  |  Performance Management  |  Activity Based Costing  |  Balanced Scorecard  |  CSFs and KPIs  |  Value Based Management  |  Transfer Pricing

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