Profit Center Definition - Investopedia

A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization's bottom line. It is treated as a ... CorporateFinance&Accounting CorporateFinance WhatIsaProfitCenter? Aprofitcenterisabranchordivisionofacompanythatdirectlyaddsorisexpectedtoaddtotheentireorganization'sbottomline.Itistreatedasaseparate,standalonebusiness,responsibleforgeneratingitsrevenuesandearnings.Itsprofitsandlossesarecalculatedseparatelyfromotherareasofthebusiness.PeterDruckercoinedtheterm"profitcenter"in1945. KeyTakeaways: Aprofitcenterisabranchordivisionofacompanythatdirectlyaddstothecorporation'sbottomlineprofitability.Aprofitcenteristreatedasaseparatebusiness,withrevenuesaccountedforonastandalonebasis.Theoppositeofaprofitcenterisacostcenter,acorporatedivision,ordepartmentthatdoesnotgeneraterevenue. UnderstandingProfitCenters Profitcentersarecrucialtodeterminingwhichunitsarethemostandtheleastprofitablewithinanorganization.Theyfunctionbydifferentiatingbetweencertainrevenue-generatingactivities.Thisfacilitatesamoreaccurateanalysisandcross-comparisonamongdivisions.Aprofitcenteranalysisdetermines thefutureallocationofavailableresourcesandwhethercertainactivitiesshouldbecutentirely. Themanagersorexecutivesinchargeofprofitcentershavedecision-makingauthorityrelatedtoproductpricingandoperatingexpenses.Theyalsofaceconsiderablepressureastheymustensurethattheirdivision'ssalesfromproductsorservicesoutweighthecosts—thattheirprofitcenterproducesprofitsyearafteryear,eitherbyincreasingrevenue,decreasingexpenses,orboth. ProfitCentersvs.CostCenters Notallunitswithinanorganizationcanbetrackedasprofitcenters.Thisisparticularlythecaseformanydepartmentsthatprovideanessentialservicewithinanorganization:theresearchdepartmentwithinabroker-dealer,theauditing/compliancehumanresourcesdepartmentofalawfirm,theinventorycontroldepartmentofaclothingretailer,humanresources,andcustomerservice.Thesedivisionshavetheirowncostsbutdonotgeneratetheirownrevenues.Asaresult,theyareknownascostcenters. Whileprofitcentersareoperatedwithafocusonbringinginrevenue,costcentersarenotassociatedwiththedirectgenerationofprofits.Costcentersalsoincludevarioussupportdepartments,suchasITsupport,humanresources,orcustomerservices,whicharecriticaltobusinessfunctions butdonothaveaspecificresponsibilitytomakemoney. RealWorldExamplesofProfitCenters AttheretailerWalmart,differentdepartmentssellingdifferentproductscouldbedividedintoprofitcentersforanalysis.Forexample,clothingcouldbeconsideredoneprofitcenterwhilehomegoodscouldbeasecondprofitcenter.Inaddition,departmentsthatrotateonaseasonalbasis,suchasthegardencenterorsectionsrelatingtoholidaydecor,canbeexaminedasprofitcenterstoseparatethesedepartments'seasonalcontributionfromthosewithayear-roundcontribution. ThecomputergiantMicrosofthasawidevarietyofprofitcentersrangingfromhardwaretosoftwaretodigitalservices.Inanalyzingtheselargerevenuesources,thecompanymaychoosetoseparatethefundsproducedfromthesaleofitsWindowsoperatingsystemfromthatofothersoftwaresuites,suchasMicrosoftOffice,orotherhardwaresectors,suchastheXboxgamingconsole.Thisallows theprofitabilityofdifferentproductstobeexaminedandcorrelatedbasedonassociatedcostandrevenuecomparisons. Theconceptofaprofitcenterisaframeworktofacilitateoptimalresourceallocationand profitability.Tooptimizeprofits,managementmaydecidetoallocatemoreresourcestohighlyprofitableareas whilereducingallocationstolessprofitableorloss-inducingunits. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more WhatChiefOperatingOfficersDo Thechiefoperatingofficer(COO)isaseniorexecutivetaskedwithoverseeingtheday-to-dayadministrativeandoperationalfunctionsofabusiness. more WhatIsWelfareEconomics? Welfareeconomicsfocusesonfindingtheoptimalallocationofeconomicresources,goods,andincometobestimprovetheoverallgoodofsociety. more InformationManagementTechnology(IMT):TheInsandOuts Informationmanagementtechnology(IMT)isthedistribution,organization,andcontrolofthetechnologyanddataofabusiness. more WhatIstheMarginalCostofProduction? Themarginalcostofproductionisthechangeintotalcostthatcomesfrommakingorproducingoneadditionalitem. more TheBasicsofBiotechnology Biotechnologyisthescientificstudyusinglivingorganismstodevelophealthcareproductsandprocesses.Learnhowtoinvestinbiotechcompanies. more PartnerLinks RelatedArticles Accounting IntroductiontoAccountingInformationSystems–AIS Banking TheDifferenceBetweenRetailBankingvs.CorporateBanking TechStocks TheEconomicsofGamingConsoles Business TheImportanceofExcelinBusiness TopStocks AnalyzingStarbucks’ValueChain CorporateFinance Conglomerates:CashCowsorCorporateChaos?