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What is a Profit Center? - Definition | Meaning | Example - My ...

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Definition: A profit center is a business unit or segment that generates revenues and incurs costs. In other words, it's a department that uses company ... Skiptocontent Menu Home»AccountingDictionary»WhatisaProfitCenter? Definition:Aprofitcenterisabusinessunitorsegmentthatgeneratesrevenuesandincurscosts.Inotherwords,it’sadepartmentthatusescompanyresourcestogenerateincome.Youcanthinkofthisasasegmentthatearnsmoneyorcreatessalesforthe business. WhatDoesProfitCenterMean? Managementseparatesallcompanydepartmentsintotwocategories,profitcentersandcostcenters,inanefforttoevaluateeachsegment’sperformanceandtheeffectivenessofitsmanagement. Example Anexampleofaprofitcenteristhesellingorsalesdepartment.This businesssegmentusescompanyresourceslikerent,salesstaffsalaries,andutilitiestogeneraterevenuesbysellingproductstocustomers.Managementtypicallyanalyzestheperformanceofboththedepartmentasawholeanditsmanager.Bothareevaluatedontheamountthatcenterrevenuesexceedcostsforaperiod.Inotherwords,higher-levelmanagementtendstofocusonthe netincome ofeachprofitcenter.Thismeansthatthedepartmentmanagerisjudgednotonlyontheamountofrevenuehebringsin,heisalsojudgedonhisabilitytocontroldepartmentalcosts. Forexample,currentyearrevenuesmighthavedoubledfromlastyear,butexpensesmighthavetripled.Inthiscase,thedepartmentisoperatinglessefficientlythanitcouldbe.Thedepartmentmanagershouldfocusonincreasingrevenueswhilemaintainingthesamecostlevels. Costcenters,ontheotherhand,can’tbedefinitionhaveprofitsbecausetheyonlyconsumerecourseswithoutactuallycontributingtotherevenuesofthecompany.Agoodexampleofacostcenteristheaccountingdepartment.Thisisanecessarydepartmentthatdoesn’tgeneraterevenuesatall.Itsimplyusesresources.Higher-levelmanagementtendstoanalyzetheperformanceofacostcenterbycomparingtheestimatedbudgetednumbersfortheperiodwiththeactualresults.Ifthecentermanagerscanachievethebudgetednumbers,theyareconsideredefficientandeffectivemanagers. Contents1WhatDoesProfitCenterMean?2Example Search2,000+accountingtermsandtopics.Searchfor: Home AccountingTopics Resources Careers [i][i]

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