Definition of Profit Center
Profit center is a responsibility center is measured in terms of profit, which is the difference between the revenues and expenses. Profit as a measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that often point to different directions.
A typical example of a profit center is a division of the company that produces and markets different products. The manager of this division will be responsible for the setting up of production policies and the price as also marketing strategies. Even though the division manager may propose the investments in the division the decisions are usually made by the top management.
Advantages of Profit Centers
- The speed of operation decisions may be increase because many decisions do not have to be referred to corporate headquarters.
- Quality of many decisions is improved.
- Headquarter management is relieved of day-to-day decisions and can concentrate on broader issues.
- Profit consciousness may be enhanced.
- Measurement of performance is broadened.
- Managers are freer to use their imagination and initiative.
- It provides a training ground for general management.
Disadvantages of Profit Centers
- Top management may lose some control.
- Lack of competent general managers.
- Disadvantageous competition between organization units.
- Friction can increase.
- Too much emphasis on short-run profitability.
- No completely satisfactory system for ensuring that each profit center, by optimizing its own profits, will optimize company profits.
- The quality of some of the decisions may be reduced.
- Additional costs.
Credit: Management Control Systems-MGU