What is a Cost Center?

A cost center is a reporting unit of a business that is responsible for costs incurred. An example of a cost center is the maintenance department of a business, where its manager is only rated on the amount of costs incurred to maintain facilities and equipment at a predetermined level. Similarly, the accounting, finance, information technology, and human resources departments are all treated as cost centers.

What is a Profit Center?

A profit center is a reporting unit of a business that is responsible for profits generated. An example of a profit center is a subsidiary , which is responsible for the amount of sales generated, as well as all costs incurred. Similarly, a country division is also treated as a profit center, as may a product line .

Comparing Cost Centers and Profit Centers

There are several important differences between cost centers and profit centers, which are as follows:

• Objective . The objective of a cost center is to minimize costs, while the objective of a profit center is to maximize profits.

• Revenue generation . A cost center does not generate revenue, while a profit center is expected to do so.

• Scope of responsibility . The main difference between the two concepts is that a cost center is only responsible for its costs, while a profit center is responsible for both its revenues and costs.

• Organizational complexity . Another difference is that cost centers tend to be organizationally simple, while profit centers are more likely to have a complex structure.

Both concepts are used in a business where senior management wants to drive responsibility down into the organization, so this cannot be considered a difference between the two concepts.

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