Profit Centre Homework Help, Assignment Help, Online Tutor, Tutoring

Submit Assignment

* *

Payment Online Assignment Help

Cost Accounting

Homework Help

sfsf

Profit Centre

A centre in which both the inputs and outputs are measured in monetary terms is called a profit centre. In other words both costs and revenues of the centre are accounted for. Since the difference of revenues and costs is termed as profit, profit is automatically computed in respect of the centre – that is why it is treated as a profit centre. The managers of such centres are encouraged to act as if they were running their own separate business. The revenue of a centre is accounted for not only when sales are affected on the basis of the recognition of revenue from the point of view of business, but also when output of one centre is transferred to some other centre on the basis of the concept of notional charge on the basis that it “sells” goods to the sales department. The accounting system can be so designed as to record revenues and profit on a notional basis immediately when the completed products are sent to the godown or sales department is made from then and accounted for as sales value in the books. Of course, these will be simply book keeping entries for fixing the responsibilities and evaluating the performance of such centres. There is no question of actual cash inflow since the transactions are simply in the nature of internal transfers. Sometimes, profits can be treated as a combined measure of efficiency and effectiveness both and if so, expense centres may be turned into profit centres, whenever it is feasible to measure the output of a centre in monetary terms, i.e. in terms of revenue by assigning a reasonable selling price to it. It is a very powerful force to measure the performance of the individual responsible for running and managing the centre, though it may not be a perfect measure. It may consist of certain pitfalls, e.g. fixation of the notional transfer price may be arbitrary – it may show unreasonable profit made by one centre and a loss by the other and thus may lead to wrong allegation of lack of responsibility by the second centre.

In case of non-profit making organisations, instead of profit centres, there may be revenue centres, since profit is not the ultimate motive of such organisations. A centre is termed as revenue centre if the manager is held accountable for the outputs of his unit. Without bothering for the costs, the concentration point is simply on maximization of outputs of his unit. Without bothering for the costs, the concentration point is simply on maximization of outputs, may be, revenues.

Whether an expense centre is to be taken as a profit centre or not depends on the decision of the management. However, some of the expense centres cannot be taken as profit centres normally, e.g. accounts department, since it is almost impossible to place a value to the services of accounts department.