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Cost Centers, Profit Centers & Investment Centers

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  • 0:04 Different Centers
  • 0:24 Cost Center
  • 1:15 Profit Center
  • 1:49 Investment Center
  • 3:07 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Businesses consist of a number of different departments, some of which generate costs and others make money. In this lesson, you will learn about cost centers, profit centers and investment centers.

Different Centers

Max just landed his first job at MN Books. During his first department meeting, his manager discusses cost centers, profit centers, and investment centers. Max remembers learning about these terms in his college accounting course, but he doesn't remember the difference between them. Let's see if we can help Max with this problem.

Cost Center

Managers make decisions every day that affect the company's operations. In an ideal situation, Max's manager would be evaluated on her performance based on factors that she can control, such as cost. A cost center is a business unit that incurs expenses or costs but doesn't generate any revenue. Remember that revenue is money from selling goods and services for the company. Examples of cost centers include accounting, human resource, and IT departments.

In Max's company, the accounting department provides services such as the monthly reporting and the annual budgets that it prepares to other departments within the company. It incurs costs to produce these deliverables, but it does not generate any revenue by providing them to other departments. The manager of the accounting department would be evaluated on her ability to control costs incurred by her department.

Profit Center

A profit center is a department that incurs costs but also earns revenue by selling its goods and services to customers. Managers of profit centers are evaluated on their ability to control costs as well their ability to generate revenue and profits, which are revenues minus expenses, in their departments.

In Max's company, there are many divisions, including fiction, non-fiction, and children's books. Each of these departments would be a profit center, as each one incurs costs and earns revenue and profit from selling its books to customers of the bookstore.

Investment Center

An investment center also incurs costs and earns revenue, but the manager of an investment center also has control over the investments that it makes to earn profits for its department or division. For example, MN Books has a discount division and a division that sells textbooks to schools. The managers of these divisions have control of the assets, which are items of value that a business owns, that the division purchases to help it generate revenue.

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