Businesses have a number of operating units that are essential to the smooth running of the business. There are certain operating units that generate revenue for the firm while there are other operating units that result in costs and expenses. Whichever way, both these types of units called profit centers and cost centers are essential to any business activity. Profit centers will make large profits continuously while cost centers do not directly create profits but are critical to a firm’s long term profitability and success. The article takes a close look at the two types of operating units and explains the similarities and difference between cost center and profit center.
Cost Center
A cost center is a division or part of an overall organization that creates costs for the company but not directly take part in generating a profit. A typical organization will have a number of cost centers that are essential to their business activities such as customer service, research and development, branding and marketing, etc. Cost centers are quite costly to maintain, and while they do result in the generation of profits in the long run, there is no direct profit generation. They are usually critical to the company’s long term profits and financial health and, therefore, these cost centers are essential to the smooth running of the business. For example, a company that maintains a cost center will not obtain a direct profit from it. However, having good customer service facilities will increase customer satisfaction and will improve the reputation of the firm which can greatly influence sales.
Profit Center
Profit centers are departments, sections, or parts of companies that are responsible for creating profits. Certain profit centers account for a large percentage of the company’s overall income and may even be one of the most important departments or divisions of the firm. The profits that are created by the profit centers will be used to cover costs, to finance cost centers, to invest, develop and expand into new business ventures. One of the main profit centers of a company is their sales division, which is responsible for a large portion of the company’s revenue. Profit centers operate with the aim of making profits and, therefore, profit centers require aggressive management techniques to keep costs controlled.
What is the difference between Cost Center and Profit Center?
Companies are made up of a collection of units, divisions, and sections known as operating units. Some units create large revenues and profits for a firm while some units result in costs and expenses. However, both types of operating units result in profits and may generate profits either directly or indirectly. Profit centers such as sales divisions are profit centers that are responsible for a large amount of company profits. Cost centers such as research and development, marketing, customer service, IT and maintenance result in large short term costs but, without these departments, a company cannot make long term profits; therefore cost centers are essential to the smooth running and long term profitability and success of businesses.
Summary:
Cost Center vs Profit Center
• Companies are made up of a collection of units, divisions, and sections known as operating units. Some units create large revenues and profits for a firm while some units result in costs and expenses.
• A cost center is a division or part of an overall organization that creates costs for the company but not directly take part in generating a profit. However, it may contribute for profit generation indirectly.
• Profit centers are departments, sections or parts of companies that are responsible for creating profits.