The difference between cost center and profit center
/What is a Cost Center?
A cost center is a reporting unit of a business that is responsible for costs incurred. An example of a cost center is the maintenance department of a business, where its manager is only rated on the amount of costs incurred to maintain facilities and equipment at a predetermined level. Similarly, the accounting, finance, information technology, and human resources departments are all treated as cost centers.
What is a Profit Center?
A profit center is a reporting unit of a business that is responsible for profits generated. An example of a profit center is a subsidiary, which is responsible for the amount of sales generated, as well as all costs incurred. Similarly, a country division is also treated as a profit center, as may a product line.
Comparing Cost Centers and Profit Centers
There are several important differences between cost centers and profit centers, which are as follows:
Objective. The objective of a cost center is to minimize costs, while the objective of a profit center is to maximize profits.
Revenue generation. A cost center does not generate revenue, while a profit center is expected to do so.
Scope of responsibility. The main difference between the two concepts is that a cost center is only responsible for its costs, while a profit center is responsible for both its revenues and costs.
Organizational complexity. Another difference is that cost centers tend to be organizationally simple, while profit centers are more likely to have a complex structure.
Both concepts are used in a business where senior management wants to drive responsibility down into the organization, so this cannot be considered a difference between the two concepts.
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FAQs
Can a Unit Shift from a Cost Center to a Profit Center?
A unit can shift from a cost center to a profit center if it begins generating revenue in addition to incurring costs. This often occurs when a department starts selling its services to external customers or creates marketable offerings. The shift requires changes to performance metrics, budgeting, and managerial responsibilities.