Cost Centre vs Profit Centre

Cost Centre Meaning

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

The cost can be the determination of both people 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 centres are:

  • Production cost centre
  • Personal cost centre
  • Service cost centre
  • Impersonal cost centre
  • Process cost centre
  • Operation cost centre

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

Profit Centre Meaning

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

The principal object of a 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 a ready reckoner for all the students to learn the difference between a cost centre and a profit centre.

 

                  Cost centre Profit centre
  Definition
A cost centre is a company’s department that supervises all the costs of the company. A profit centre is a company’s department that is responsible for the profits of the company.
                                                                                 Responsibilities
Reducing costs and effective cost control within the organisation Helping in earning profits and maximising revenue
                                                                         Complexity involved
A cost centre has lesser complexity as the only focus is on costs. A profit centre is more complex as it has to focus on costs, profits, and revenue.
                                                                           Approach followed
Short-term approach Both short and long-term approaches are followed
                                                                        Scope of operations
Comparatively narrow Comparatively wide

This concept was about the difference between a cost centre and a profit centre. Stay tuned for questions papers, sample papers, syllabus, and relevant notifications on our website.

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Frequently Asked Questions

Give a few examples of cost centres.

Examples of cost centres are: a company’s accounting department, legal department, advertising and marketing department, and research and development department.

What is the main objective of a cost centre?

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

How do cost centres perform?

Cost centres perform by simply evaluating the actual expenses and then comparing them to the allocated budget.

Give an example of a profit centre.

An example of a profit centre is the sales department.

Can a centralised department be a profit centre?

Yes, a centralised department can be a profit centre with a limited decision-making authority.

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