Reviewed by Jan 29, 2021| Updated on
A profit centre refers to a branch, unit, or division of a company which directly adds or which normally adds to the bottom-line or profits of the company as a whole. The term cost centre was coined by Mr Peter Drucker. An organisation considers a profit centre as a separate unit, a standalone business which is responsible for revenue generation and profits. An organisation calculates the profits and losses of a profit centre separately.
With the creation of profit centres, an organisation differentiates between different revenue-generating activities. Profit centres are critical for determining the units which are the most profitable and the ones which are least profitable in an organisation. The profit centre-wise analysis enables accuracy and a comparison between divisions.
The division-wise analysis helps in determining the allocation of resources as between profit centres, and also determines which activities can be cut down and which need a boost. The managers of individual profit centres have decision making authority with respect to the pricing of products and managing operating expenses.
Each manager is responsible for the performance of their profit centre. Hence, it is necessary that the managers identify wasteful activities and cut down the same. The managers can also alter the nature of activities or increase the bandwidth for certain activities. On an overall basis, the managers need to increase the sales and profits of their division.
A particular grocery chain can divide different departments selling different products into profit centres, making their individual managers accountable for the progress of their division. The grocery chain can consider vegetable oil and body shop segment as different profit centres. Similarly, companies in the information technology space can consider package software and ITES as separate segments.
An organisation should bear in mind the activities carried out in each centre before categorising it into a profit centre. In each organisation, there are support service departments which do not carry out any profit-generating activities. Such departments are not profit centres; however, they are essential for the organisation.