CONCEPT OF PROFIT CENTRE IN FINANCE, ACCOUNTING & COSTING

A profit centre is a part of an activity or a basic activity of a business which requires expenses to be incurred to give revenue. It gets independent say in decision making within broad corporate guidelines. For example, if we set up branches of AFTERSCHOOOL, they will work as profit centers. Thus profit or loss of such an activity can be disclosed from such expenses and revenue. The purposes of forming a profit centre are as follows :-

i) To delegate responsibility to individuals.
ii) To measure the performance of individuals.

Differences between a Cost centre and a Profit centre :
The differences between a cost centre and a profit centre can be studied under the following main points :
i) Meaning :
A Cost cantre is the smallest unit of activity or area of responsibility for which costs are collected.
Profit centre is the segment of activity which is responsible both for revenue and expenses.

ii) Purpose :

The purpose of creating Cost centres is to gain accounting conveniences of cost and their control.

The purpose of creating a Profit centre is to delegate the responsibility to individuals who have greater knowledge of the local conditions.

iii) Autonomy:
Cost centres are not autonomous but Profit centres are autonomous.

iv) Target:

A Cost centre does not have cost target, but efforts are made to minimise costs and keep them within a target.

A Profit centre usually has a profit target and necessary policies are adopted by the business for its achievement.

v) Number of centres :

There may be a number of Cost centres in a Profit centre such as production cost centres or personal cost centres or impersonal cost centres.

A profit centre may be a subsidiary company within a group or division in a company.