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Cost Centre vs Profit Centre

Cost Centre Meaning:

A Cost Centre is a department or a unit which supervises, allocates, segregates, and eliminates all sorts of costs related to a company. The cost centre prime work is to check the cost of an organisation and to limit the unwanted expenditure the company may acquire.

The cost can be the determination of both person and location. In multinational companies, the cost centre is authorised to decrease and manage the cost. These costs are generally monitored by analysing and deducting the actual cost incurred with the standard cost.

Few types of cost centre are mentioned below:

  • Production Cost Center
  • Personal Cost Center
  • Service Cost Center
  • Impersonal Cost Center
  • Process Cost Center
  • Operation Cost Center

For example, the customer service department may not generate direct profits for a business, but it supports to control the expenses of business (by conceptualising what customers want) and also aids in reducing the costs of a company.

Profit Centre Meaning:

A Profit Centre is a division or department of a company which operates for the calculation of profit. In an organisation, different profit centres are managed by the managers, who identifies profits on the basis of costs and revenues. Profit Centre is accountable for all the actions associated with the sale of goods and production.

The principal object of the profit centre is to generate and maximise the profit, by minimising the cost incurred and increasing sales. This objective helps to uplift the profit-making capability of a company. The accomplishment of a profit centre is estimated in terms of profit growth, during a definite period. The achievement of a profit centre is examined by subtracting the actual cost from the budgeted cost.

This article is ready reckoner for all the students to learn the difference between the Cost Centre and Profit Centre.

                      Cost Center

Profit Centre

A cost centre is a company department that supervises the all the cost of the companyA profit centre is a company department which is responsible for the company profits
Reducing cost and effective cost control within the organisationHelp in earning profits and maximising revenue
                                                        Complexity involved
Cost center has lesser complexity as only focus is on costsProfit center is more complex since it has to focus on cost, profit and revenue
                                                          Approach followed
Short term approachBoth short and long term approach followed
                                                          Scope of operations
Comparatively narrowComparatively wide

The above mentioned is the concept, that is elucidated in detail about ‘Difference between Cost Centre and Profit Centre’ for the Commerce students. To know more, stay tuned to CoolGyan’S.

Frequently Asked Questions on

What is an example of a cost center?

An example of cost center is the company’s accounting department, legal department, advertising and marketing department, and research and development etc

What is the main objective of a cost center?

The main objective of a cost center is to track expenses of a company.

How does cost center perfrom their work?

The cost center performs their duty by simply evaluating the actual expenses and then comparing it to the allocated budget.

What is an example of a profit center?

An example of a profit center is the sales department.

Can a centralized department be a profit center?

Yes, the centralized department can be a profit center with limited decision-making authority.