Difference Between Cost Center and Profit Center

People often get confused when using the terms cost and profit centre when talking about an organisation’s management structure.

Key Takeaways

1. A cost center is a department or unit that incurs costs but does not generate revenue, while a profit center is a department or team that generates revenue and profits.
2. Cost centers are essential for running a business but do not directly contribute to the bottom line, while profit centers are crucial for the financial success of a business.
3. Cost centers can be managed by controlling costs and improving efficiency, while profit centers require a focus on revenue growth and profitability.

Cost Center vs Profit Center

A cost center is a department or unit within a company that incurs expenses but does not directly generate revenue and aims to control and reduce costs. A profit center is a department or unit within a company that generates revenue and incurs expenses, and aims to increase revenue and profits

Cost centres and profit centres as separate units help the organization identify and develop a solution to reduce costs and maximize sales, respectively.

Comparison Table

Parameter of Comparison	Cost centre	Profit centre
Definition	A cost centre is responsible for managing all the costs in an organization	The profit centre is responsible for moderating all the revenues in an organization.
Purpose	Evaluation of costs helps in minimizing costs in an organization.	Revenue reports can help to increase revenue by generating more sales.
Area of operation	Narrow	Wide
Assessment of performance	By subtracting the Actual cost from the standard Cost	By deducting the Actual cost from the Budgeted cost.
Role in the organization	Less challenging	More challenging
Intention	The cost centre only needs to meet the budget of the organization.	A profit centre is intended to show a return on investment.

What is the Cost Center?

The cost centre helps an organization evaluate the costs and how to reduce them. It is also considered a subunit or a separate department in an organization.

Although the work is less demanding, the work is crucial for identifying where costs are incurred. Cost centres only deplete the organisation’s resources without directly contributing to generating revenue.

This department also offers remedial solutions to reduce costs. The costs incurred have to be well within the budget of the organization.

Types of cost centres include- personal, impersonal, service, operation, production and production cost centres. Defining a few of the types of cost centres:

1. Service cost centres: This supports the profit centre to enable better organisational functioning.
2. Production cost centres: This type helps a company’s production processes. The advantage of this type of centre is how they facilitate the processing of products. 

What is a Profit Center?

A profit centre is an essential organisational subunit responsible for the revenues, profits and costs. Profit centres pose a more demanding job profile yet significantly impact the organization.

The budgeting, investment, and returns are all calculated from the reports by the profit centre. Profit centres have responsibilities specific to the production and sale of goods. Businesses run for the sole purpose of generating profits.

Without profit centres, it will be impossible for the business to survive. Cost centres back profit centres to help generate profits.

There are two types of profit centres:

1. A subunit in a considerable organization: Profit centres can be subunits or strategic units in a vast organization.
2. A department in an organization: Sales division of a company usually handles the work of a profit centre. The sales division is a department under the organization. Therefore it is an example of this type of profit centre.

Main Differences Between Cost Center and Profit Center

1. Profit centres have a wider area of operation than Cost centres, as they tend to be responsible for revenues, profits, and costs.
2. The type of work that goes into the cost centre is easy as it only involves handling costs. However, handling revenues, profits, and costs is a difficult task for the Profit centre compared to cost centres.
3. Cost centre approaches are short-term as the cost incurred by an organization might keep fluctuating with time. As for-profit centres, its approach is both short and long-term. It is so because reports regarding the current profit situation can help make future decisions.
4. Cost centres help to indirectly generate profits while facilitating the Profit centres, which are directly associated with generating profits.
5. The performance of a profit centre is identified by deducting the actual cost from the budgeted cost. However, the performance of a cost centre is estimated by subtracting the actual cost from the standard cost.
6. Cost centres do not participate in or facilitate the generation of profits or returns. Cost centres give the estimation of the cost incurred. Profit centres give detailed reports of profit, revenue, and the cost of generating solutions for maximizing sales.
7. An organisation can have several cost centres, but there is only one profit centre.
8. Cost centres only track the expenses made by the company, whereas profit centres work to generate profits.