What is a Profit Centre?

A Profit Centre is a division of an organization responsible for its profits and losses. It can be a business unit, geographical area, or product line. A Profit Centre is typically managed separately from other divisions of the organization to assess its performance and make decisions about its future.

What is the purpose of a Profit Centre?

The primary purpose of a Profit Centre is to increase the organization's overall profitability. By breaking down the business into separate profit-generating units, it is possible to identify and address underperforming areas, make better decisions about allocating resources and measure individual performance against specific goals.

How is a Profit Centre different from a cost centre?

A Profit Centre is responsible for its profits and losses, whereas a cost centre is not. A cost centre is a division of an organization responsible for controlling costs but does not generate revenue. Typically, a cost centre is managed separately from other divisions of the organization to assess its performance and make decisions about its future.

How should an organization go about setting up Profit Centres?

The process of setting up Profit Centres should be tailored to the organization's specific needs. Typically, it will involve dividing the business into different areas based on geography, product line, or business function. Each Profit Centre should then be given its budget and tasked with achieving specific goals. Finally, staff within each Profit Centre should be held accountable for their results, and performance measures should be put in place to track progress.

What are the difficulties of running a profit center?

Decentralized decision making may provoke questioning of decisions taken at the business level if headquarters are more capable of generating profits.

Responsibility Accounting MCQ Quiz With Answers

This quiz consists of multiple choice questions (MCQs) on responsibility accounting. Students can use the test to assess their conceptual learning about the topic.

If you find it challenging to answer these questions, we advise that you thoroughly read our chapter on responsibility accounting. To begin the quiz, simply complete the questions below.

1. Which of the following correctly describes a cost center?

A business segment whose manager has control over costs but not over revenue or investment funds
A business segment whose manager has control over both cost and revenue but not investment funds
A business segment whose manager has control over cost, revenue, and investments
All of the above

2. Which of the following correctly describes a profit center?

A business segment whose manager has control over costs but not over revenue or investment funds
A business segment whose manager has control over both cost and revenue but not investment funds
A business segment whose manager has control over cost, revenue, and investments
All of the above

3. Which of the following correctly describes a responsibility center?

A business segment whose manager has control over costs but not over revenue or investment funds
A business segment whose manager has control over both cost and revenue but not investment funds
A business segment whose manager has control over cost, revenue, and investment
All of the above

4. Which of the following is a false statement about segmented income statements?

They may be prepared according to traditional methods with little attention paid to differentiating fixed and variable costs
They should be prepared in a variable costing format
Variable and fixed costs should be listed in separate sections
If a segmented income statement indicates a negative segment margin, that segment should be eliminated

5. Which of the following is true about common fixed costs?

A common fixed cost is incurred due to the existence of the segment
If any segment did not exist, the common fixed cost would not occur
Only common fixed costs are charged to individual segments in the segmented income statement
Common fixed costs support the operations of more than one segment