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Difference between cost center and profit center

Difference between cost center and profit center

An activity center or responsibility center is the unit of the business organization that is considered for a specific activity or activity. Cost center and profit center are the two main types of activity centers. A center for which the established cost is used for cost control purposes known as Cost center, while a center whose performance measurement can only be made through its earning capacity known as Profit center .

The assessment of the cost center useful for making a regular comparison of costs and its control. On the other hand, a profit center includes both the cost it entails and profits from it. These are created with the aim of assigning responsibilities to individuals and assessing their performance. In this pantry, we have collected the fundamental differences between cost center and profit center

Comparative chart

Basis for comparison Cost center Profit center
Sense The cost center is a department of a company to which direct and indirect costs are charged. The profit center is a department of an entity that recognizes profit.
Objective Cost control and cost reduction. Ascertain the exact profit and maximize it.
Performance evaluation Deducting the actual cost from the standard cost Deducting the actual cost from the budgeted cost
Operation area Strict Wide
Role Less demanding Very challenging.

Cost center definition

A cost center is a unit of a business organization to which various types of costs are assigned, segregated and eliminated. It can be any person or position or the combination of both, for which the cost is determined. Cost centers are mainly established in large organizations to reduce and control costs. Its performance can be monitored by comparing standard costs with actual costs incurred. The following are the types of cost center in an organization.

  • Production cost center
  • Service cost center
  • Personal cost center
  • Impersonal cost center
  • Cost center of the operation
  • Process cost center

Profit center definition

The profit center is a department of an organization that works to ascertain profit. There are several profit centers in a business organization that are managed by managers, who recognize profits based on revenues and costs. responsible for all activities associated with the production and sale of goods.

The ultimate goal of the profit center is the generation and maximization of profit, increasing sales and decreasing the cost incurred, which will boost the company's earning capacity. The performance of a profit center assessed in terms of increasing profits over a particular period.

Key differences between cost center and profit center

  1. The cost center is a department of an organization for which costs are ascertained, while the profit center is a department of an organization that tests the profit.
  2. There are many cost centers in one profit center.
  3. The role of a very stimulating profit center compared to a cost center, as the profit center must maximize profits together with the reduction of direct and indirect costs, but the cost center must work only to minimize costs.
  4. The cost center responsible only for costs, while the profit center responsible for both costs and revenue.
  5. The performance of a cost center is assessed by reducing the actual cost of the standard cost. On the contrary, the trend of the profit center is analyzed by deducting the actual cost from the estimated cost.

Conclusion

The cost center is a segment of a business organization. Examples of a cost center include a production, administration, research and development and service department of the organization responsible for the costs of that particular department.

On the other hand, the profit center is a specific division of the entity, which is responsible for its revenue, which translates into profit. Examples of a profit center could be a sales organization or a shop, etc. All cost centers in an organizational unit are profit centers, but all profit centers are not cost centers.