Profit Center Accounting
A Profit Center is often recognized as a separate part in a business which has the ability to be identified by itself. A department which by itself generates revenue for an organization and also has its own cost is known as Profit Center. Profit Center can be defined as a specific field in which business operates and all the costs and profit from that field can be distinguished easily from the other field of same business.
Benefits of identifying Different Profit Center:
A single business may have different Profit centers as it is possible that it can have profit from many sources and each source has the ability to be recognize by itself. A Profit Center Accounting helps to recognize profit from each department and lets us know which center is doing well and where resources are lacking. Profit Center Accounting helps management to decide where they should allocate more resources so that profit will increase and where management should reallocateresources so that department can be brought to Break Even.
Profit Center Accounting is also very useful to determine whether the existing department should be continued or it should be shut down from the business.
Decision making in Profit Center:
It can be explained with the help of an example. There are 4 profit centers in a business and their individual Profit/ (Loss) for 4 Years are as follows:
Particulars Year 1 Year 2 Year 3 Year 4
Department A 50000 $ 75000$ 125000 $ 175000$
Department B 75000$ 50000 $ 20000$ 10000$
Department C (5000) $ (15000) $ (25000) $ (50000) $
Department D 100000 $ 300000 $ 600000 $ 900000 $
By analyzing the table, we can easily conclude that Department D is the most profitable one and Management should give more focus on Department D and Department A as it is bringing lot of Revenue to the Company. However when we analyze Department C , it is continuingly incurring losses from past 4 Years and Management has to decide whether they should continue Department C or they should Shut down Completely . By Shutting down Department C, Company’s Overall profit will increase and it will be more financially Stable and healthy.
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