PROFIT CENTERS

BY ABDULLAH MANSURI

INTRODUCTION
A profit centre is a responsibility unit that measures the performance of a division, product line, geographic area, or other measurable unit. A profit center manager is held accountable for both revenues, and costs (expenses), and therefore, profits. It activities generating to cash inflows and at the same time control the cost (cash outflows)

Usually different profit centers are separated for accounting purposes so that the management can follow how much profit each center makes and compare their relative efficient and profit. EXAMPLE: Examples of typical profit centers are a store, a sales organization and a consulting organization Profit Centers can also identify entire divisions within companies, such as: Manufacturing division Service division Sales division

CONCEPT
The concept of profit centers enables a company's executives and management to determine how best to focus its resources to maximize profitability.

In order to optimize profits, management may decide to allocate more resources to highly profitable areas, while reducing allocations to less profitable or lossmaking units.

CHART

ADVANTAGES
It is to Control on Costs and Revenue generating activities, divisions, people, processes, projects etc. to have a firm grip on profitability which is Revenue - Cost = Profit. It also helps to take accurate Business decisions. The advantage of Profit Centre Accounting is the ability of the Management to identify the Centres within the Organisation that are Profitable and the ones that are not.

 You can Group Profit Centres based on the Company criteria. Profit center provide top management with readymade information on the profitability of the companies individual components Because their output is so readily measured.

DIS-ADVANTAGES
It makes the top management to rely more on management control report than on personal knowledge of an operation.

Divisionalization may impose additional cost because of the additional management, staff, perssonel, and record keeping required which will effect the profit center

PROFIT CENTERS
INPUT ARE RELATED TO OUTPUT

INPUTS

WORKS

OUTPUT

BUSINESS UNIT

CASE
Nokia corporation, the worlds No.1 producer of mobile phone, faced considerable slowdown in sale in 2001. As part of the turnaround strategy, on may 1, 2002, nokia corp, split its business into different profit centers, each with responsibility for a specific market segment (e.g. the mobile entry product division will focus on budget phones for developing countries). It is to allow the co. to focus effectively on each global niche market and there by achieve faster sale growth.

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