A profit center is a part and parcel of a business organizations which generates revenue and also absorbs its own costs, making it possible to calculate the department’s profit as a self generated unit. Profit centers may include a general or specific area in which a business operates or a specific market that it operates in, as long as the costs and revenues for that market can be differentiated from those that apply to other markets. It’s responsible for generating its own revenue on a standalone basis.
Importance of Profit Centre
1. A company’s key management team can better focus on a specific or a group of profit centres if they have a practice of dividing the organization’s operations , and business units into different profit centres.
2 . In some situations some of an organization’s profit centres only operate as the management predicts and the rest of the departments may not do well. In such situations it will be easy to allocate the resources among different divisions of an entity. They can reduce the costs that are being absorbed by loss making centres.
3. Any business organization has a variety of distinct departments, divisions, or operating groups, each having separate responsibilities and each contributing to the overall growth of a company.
4.It becomes easier to identify where the costs have been incurred in excess of the revenue generated by it on a standalone basis. Thus corrective measures can be implemented on that specific profit centre.
5. Investors can easily analyse the company’s overall performance based on the costs and revenue belonging to a specific profit centre individually.
Example of Profit Centre:
Consider NOKIA whose main business is producing electronic gadgets especially handsets , in order to make a finished handset they should first of all ,manufacture the components required say processor, camera parts ,keypad ,display and many more like such. For the purpose of better management of each task they can treat each department as a separate profit centre so that each department can be managed individually .Thus in any case if they want to reduce the cost incurred a specific component manufacturing division on becomes easier to do so. Instead of operating as one large company it is better survive as many small divisions.
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