Table of Contents
What is Cost Center?
A cost center is a unit within an organization that does not directly increase the profit of the organization but still costs money to run. In most cases, a cost center is established to track company expenses.
A cost center also ensures that the company’s costs are within budget. Human resources and accounting are two examples of cost centers.
The primary function of a cost center is to keep track of expenditures. A cost center manager is only accountable for ensuring that spending stays within budget; they are not accountable for sales or investment decisions. To improve control and cost analysis, cost centers can be used to segment expenses.
Cost centers do not have to be as large as departments. It could be a function or a unit.
Although cost centers do not directly increase a company’s revenue, their operations, such as customer service, may aid in the company’s growth.
Cost centers will assist management in making better use of resources by analyzing how they are used within the organization.
What is Profit Center?
A profit center is a business unit established to increase the company’s revenue. A profit center is frequently treated as a separate business within a corporation. Profit center managers have authority over product pricing and unit expenditures.
They are constantly under pressure to ensure that the revenue generated by their unit’s products or services exceeds the costs—that their profit center generates profits year after year, either by increasing profit or cutting costs, or both.
Microsoft, for example, has several profit centers ranging from hardware to software to online services.
Difference Between Profit Center and Cost Center
- Cost centers are meant to reduce expenditures to only what is in the company’s budget. Profit centers are meant to generate revenue for the company.
- Cost centers help profit indirectly. Profit centers generate profit directly.
- The type of work of cost centers are narrow as they focus only on reducing costs. Profit centers have a wider spectrum of work as they focus on profit, revenue, loss and costs.
- Profit centers are divided into several sub-divisions based on activities such as account and finance, employee relations etc. Cost centers are classified based on sales-based parameters such as product lines etc.
- Examples of cost centers include human resources (HR), accounting etc. Examples of profit centers include sales department in a retail store.
- The goal of cost centers is to reduce expenses in a way that won’t hamper the activities of the departments. The goal of profit centers is to increase income while keeping expenditures under control in order to optimize total earnings.
Comparison Between Profit Center and Cost Center
|Profit Center||Cost Center|
|Meant to generate revenue for the company.||Meant to reduce expenditures to only what is in the company’s budget.|
|Helps profit directly||Helps profit indirectly|
|The type of work of cost centers are narrow as they focus only on reducing costs.||Have a wider spectrum of work as they focus on profit, revenue, loss and costs.|
|Are divided into several sub-divisions based on activities such as accounting, employee relations etc.||Are classified based on sales-based parameters such as product lines etc.|
|Examples include profit centers include sales department in a retail store.||Examples include human resources (HR), accounting etc.|
|The goal is to increase income while keeping expenditures under control in order to optimize total earnings.||The goal is to reduce expenses in a way that won’t hamper the activities of the departments.|