From Cost Center to Profit Center
Introduction
Organizations with decentralized operations structures typically divide their operations into cost or profit centers. It is a management and strategic decision for companies to decide which divisions should be cost centers and which ones should be profit centers. .
A cost center may actually provide services that could generate a profit if they were offered on the open market. But in most corporate environments, cost centers are not expected to generate a profit and operation costs are treated as overhead. Departments that are typically cost centers include information technology, human resources, accounting, and others.
Both cost and profit centers would add something to the bottom line of companies. Profit centers could generate profits for companies. Cost centers would reduce costs therefore increase profits for companies. Sometimes, a cost center in one company may be a profit center in some other company. Thus, a center that directly relates to the core competence of the company is usually a profit center and all other centers that do not have directly related to core business would be cost centers.
However, in recent year, more and more companies which have operated with cost centers in the past decide to change some or all of those cost centers to profit centers. They feel that these changes may generate more benefits for the organization in the long-run. This paper will discuss the difference between cost center and profit center and the reasons for conversion. It will introduce a success story; examine the considerations which must be taken into account when making this determination.
Definition
In business, an operating unit is either making money or it 's detracting from a company 's profits. Simply, this is the difference between a profit center and a cost center.
A cost center is a unit of an organization that generates expenses and has no responsibility for generating revenue. The only expectation a cost center has
Organizations with decentralized operations structures typically divide their operations into cost or profit centers. It is a management and strategic decision for companies to decide which divisions should be cost centers and which ones should be profit centers. .
A cost center may actually provide services that could generate a profit if they were offered on the open market. But in most corporate environments, cost centers are not expected to generate a profit and operation costs are treated as overhead. Departments that are typically cost centers include information technology, human resources, accounting, and others.
Both cost and profit centers would add something to the bottom line of companies. Profit centers could generate profits for companies. Cost centers would reduce costs therefore increase profits for companies. Sometimes, a cost center in one company may be a profit center in some other company. Thus, a center that directly relates to the core competence of the company is usually a profit center and all other centers that do not have directly related to core business would be cost centers.
However, in recent year, more and more companies which have operated with cost centers in the past decide to change some or all of those cost centers to profit centers. They feel that these changes may generate more benefits for the organization in the long-run. This paper will discuss the difference between cost center and profit center and the reasons for conversion. It will introduce a success story; examine the considerations which must be taken into account when making this determination.
Definition
In business, an operating unit is either making money or it 's detracting from a company 's profits. Simply, this is the difference between a profit center and a cost center.
A cost center is a unit of an organization that generates expenses and has no responsibility for generating revenue. The only expectation a cost center has