What Is a Profit Center?
A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization’s bottom line. It is treated as a separate, standalone business, responsible for generating its revenues and earnings. Its profits and losses are calculated separately from other areas of the business.
What Is a Cost Center?
A cost centre is defined as a function or department within a company which is not directly going to generate revenues and profits to the company but is still incurring expenses to the company for its operations. The contributions made by the cost centres in terms of profits is indirect.
It is very much, unlike a profit centre, whose actions will directly result in the profits to the company. The offices of the cost centres, like human resource executives and accountants, are given the responsibility of keeping the costs well below the budget allocated to them.
Profit Centers vs. Cost Centers
Not all units within an organization can be tracked as profit centers. This is particularly the case for many departments that provide an essential service within an organization: the research department within a broker-dealer, the auditing/compliance human resources department of a law firm, the inventory control department of a clothing retailer, human resources, and customer service. These divisions have their own costs but do not generate their own revenues. As a result, they are known as cost centers.
While profit centers are operated with a focus on bringing in revenue, cost centers are not associated with the direct generation of profits. Cost centers also include various support departments, such as IT support, human resources, or customer services, which are critical to business functions but do not have a specific responsibility to make money.
Conclusion
Profit Center: A unit of an organization that generates both revenue and expenses. Its goal is to have revenue exceed expenses.
Cost Center: A unit of an organization that generates expenses and has no responsibility for generating revenue. Its goal is to adhere to expense budgets.
Profit Centers can be set-up to identify product lines, divisions, geographical regions, offices, production sites or by functions. Profit Centers are used for Internal Control purposes enabling management the ability to review areas of responsibility within their organization.
The difference between a Cost Center and a Profit Center is that the Cost Center represents individual costs incurred during a given period and Profit Centers contain the balances of costs and revenues.