Micro profit centers as a younger sibling of cost, revenue, profit, and investment centers

You may have heard about cost centers, revenue centers, profit centers, and investment centers. These are typical organizational units (responsibility centers) that companies have these days. A micro (pseudo) profit center is a similar concept, but it differs in its size, purpose and, sometimes, results. In this article, we will talk about micro profit centers in accounting and how they fit and work in organizations.

1. What is a micro (pseudo) profit center?

Organizations usually have cost centers, revenue centers, profit centers, or investment centers. They are responsibility centers.

  • Cost centers are company units that are primarily concerned with managing costs. These units don’t usually have direct revenues from the sale of goods or services. For example, accounting and legal departments are cost centers. Manufacturing divisions are cost centers as well. Middle levels managers and some executives usually run cost centers.
  • Revenue centers are company units that are primarily concerned with managing revenues. A regional sales division is an example of a revenue center. While revenues (sales) are the primary performance measure for revenue centers, they may still be accountable for marketing costs. Sales and marketing managers usually run revenue centers.
  • Profit centers are company units that manage and influence both revenues and costs. As you know, profit is the difference between revenues and costs, hence the name. Regional divisions (accountable for all operations in a region that bring both revenues and costs) are examples of profit centers. Senior managers usually run profit centers.
  • Investment centers take the concept of a profit center further by introducing the accountability for invested assets or capital.  An investment center is responsible for managing costs and increasing revenues and profits while also managing an appropriate return on invested assets or capital. An entire company or subsidiary is an example of an investment center. Executives usually run investment centers.

A deviation from the four responsibility types is a micro (pseudo) profit centerThese are micro-units within an organization.  The concept of micro profit centers has been around for a long time, but it may not have gained a mainstream adoption. A well-known example of a company that has been successfully using micro profit centers for decades is Kyocera. This company calls such centers “amoebas.”

Why does it have “micro” and “profit” in its name? First, micro profit centers usually include a small number of employees (e.g., 5-50 employees), which is a fraction of the number of employees in conventional responsibility centers (e.g., departments, product lines, divisions). Second, micro profit centers do not usually have a direct influence over generated revenues and only manage costs; however, there is an indirect way of looking at the center’s profitability by implying revenue numbers. Managers or leaders of micro profit centers prepare a profit and loss statement (income statement) for the benefit of their members so they can understand, track, and improve performance over time.

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