Difference Between Cost Center vs Profit Center
People often get confused between cost center and profit center, like which is what exactly. The primary difference between cost center and profit center is that cost center is a department or sub-division within an organization that is responsible for managing the organization’s cost, while profit center is also a sub-division in an organization that focuses on maximizing profits by intensifying the organization’s revenue generation. This article Cost Center vs Profit Center, would help you understand the differences between the two types of business sub-divisions in more detail.
What is Cost Center?
A cost center is a sub-division within an organization that is responsible for managing the costs incurred within the organization. Typically, it is that part of the business that doesn’t generate any revenue but ensures proper functioning of the key revenue-generating units of the business, and in that process, it incurs costs. Generally, the cost allocations are done by the management based on these cost centers. The management focus is to limit the costs of the cost centers while ensuring that the functions are not impacted. In this way, cost centers help in cost budgeting and cost control.
For instance, various support functions within an operating concern are indispensable parts of the business, such as the accounts & finance department, administration department, human resource department, etc.
What is Profit Center?
A profit center is a sub-division within an organization that is responsible for maximizing profit by increasing revenue generation from the business. Since it utilizes all the available business resources for generating revenue, it has both revenues and costs. Hence, revenues and costs are allocated to all the profit centers as it helps in identifying the profitability of the various revenue-generating units. In this way, it helps the management take decisions pertaining to various profit-generating operations of the business. The management focus, in this case, is to increase revenues and reduce costs in order to optimize the overall profitability of the business units.
For instance, the production and sales departments are considered the profit centers for a manufacturing company. On the other hand, the different product categories are considered the profit centers of a retail store.
Head To Head Comparison Between Cost Center vs Profit Center (Infographics)
Below is the top Comparison between Cost Center vs Profit Center:
Key Differences between Cost Center vs Profit Center
Some of the key differences between a cost center and a profit center are as follows:
- A cost center is a sub-division within an organization for which the incurred costs are determined, while a profit center is a sub-division within an organization for which the revenue generated and incurred costs are ascertained to eventually determine the profit.
- A cost center is only responsible for minimizing the costs, while a profit center is not just focused on minimizing the costs but also maximizing the profit through increased revenue generation.
- The performance evaluation of a cost center is done by comparing the actual incurred cost with the standard cost. On the other hand, the performance evaluation of a profit center is done by analyzing the actual cost against the budgeted cost.
- There can be several cost centers associated with a single profit center.
Cost Center vs Profit Center Comparison Table
Below is the 10 topmost comparison between Cost Center vs Profit Center:
|
Head |
Cost Center |
Profit Center |
| Definition | A department or sub-division within an organization that manages cost incurrence. | A department or sub-division within an organization that ensures profit maximum. |
| Contribution to revenue | It doesn’t directly contribute to the revenue per se. But it indirectly impacts revenue as the cost centers support revenue generation. | It directly helps in the generation of revenue through its operations. |
| Segregation | Cost centers are usually segregated into several sub-divisions based on activities, such as accounts & finance, administration, customer relations, employee relations, etc. | Profit centers are often segregated based on sales-related parameters, such as area of sales, varied product lines, etc. |
| Purpose | To support the functions and activities that help in the generation of revenue for the business. | To help in the generation of actual revenue for the business. |
| Management focus | The management focus is to trim the costs while ensuring that the functions of the departments aren’t hampered. | The management focus is to increase revenue generation while keeping a tight rein on the costs to maximize overall profits. |
| Authority of department heads | The decision-making authority of the department heads is limited to controlling the costs within a pre-defined limit. | The decision-making authority of the department heads is broad and includes decisions pertaining to production levels, product pricing, etc. |
| Performance analysis | The performance analysis is done by comparing actual costs to the pre-determined standards costs for all departments. | The performance analysis is done by comparing actual costs to the budgeted costs defined for particular revenue levels. |
| Analysis of activities | It is relatively easy to analyze the activities as it only deals with the costs. | It is quite complex to analyze the activities as it involves both costs and revenues. |
| Relevance | It is an essential part of management accounting as it helps in the accumulation of cost-related data, which is used then for budgeting, cost control, and other internal reports. | It is relevant as it helps in the accumulation of profitability-related data, which is used for sales, pricing, and production-related decisions. |
| Examples | The human resources (HR) department provides business support by handling issues linked to employees, who are the direct contributors to revenue. | Sales departments in a retail store is an example of profit center in a business as it directly helps in revenue generation. |
Conclusion
So, it can be seen that both cost center and profit center are important parts of any business. Without appropriate support from cost centers, it would be very difficult to sustain a business for a long period of time. But, on the other hand, profit centers help in achieving the desired profit levels, which is the focus for most stakeholders and external parties.
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