Cost Center vs Profit Center

As a start-up business grows into a thriving company, it might need to separate into different departments. Some, like sales, are concerned with generating revenue, while others focus on other tasks like accounting and finance. One way to break down different segments of a company is by profit or cost. Here’s a closer look at the difference between a cost center vs profit center within the same company.

Cost center meaning

Cost centers are any units or departments within a business that are responsible for incurring costs. For example, a maintenance department would qualify as a cost center because it spends money to maintain facilities and equipment rather than generating profit.

Additional illustrations of the cost center meaning could include:

• Human resources

• Accounting

• Information technology

• Finance

• Customer service

These departments are essential to the overall operations of a company, but they don’t directly generate profit. Instead, they generate and manage the costs that keep the business running smoothly. A cost center must stick to a budget and limit any unnecessary expenditure as part of its main function. For example, an accounting department doesn’t generate profit but it does control expenses by keeping financial statements and accounts in order.

Profit center meaning

By contrast, profit centers are any business units that directly generate profit. These include the sales departments and subsidiaries, which are responsible for managing both their own costs and profits. A standalone product line could qualify as a profit center, as could a regional division of the larger company. Profit centers work under the supervision of managers who balance costs and revenues to drive profit. They’re responsible for all actions related to production and the sale of goods.

To illustrate the profit center meaning, imagine a department store with several divisions:

• Household goods

• Electronics

• Books and magazines

• Groceries

• Clothing

Each department within the larger company has its own manager, responsible for managing costs and meeting target sales figures.

Cost center vs profit center: what’s the difference?

While both cost centers and profit centers work have the same goal of furthering a company’s growth, there are some key differences to be aware of.

• Cost centers are responsible solely for costs

• Profit centers are responsible for revenues and costs

• Cost centers tend to focus on a single task

• Profit centers juggle multiple management tasks

• Cost centers have a simple structure and organization

• Profit centers are more complex with their organization

Cost center vs profit center vs investment center

We’ve now covered the differences between cost centers and profit centers, but there’s a third type of division that you might come across. Investment centers are concerned not only with costs and revenues, but also with capital investment. For this reason, company divisions and subsidiary companies are sometimes called investment centers rather than profit centers. The head of a regional division might have sway not only over managing the organization’s expenses and profits, but also investing its funds most wisely to generate more revenue. 

Sometimes called an investment division, these units use capital to increase the company’s profits and are evaluated by the revenue they’re able to bring in. Unlike cost and profit centers, investment centers aren’t necessarily limited to activities directly related to the company’s central operation. They can invest capital in outside assets or companies to diversify the company’s risk. They’ll maintain their own financial statements including the income statement, cash flow statement, and balance sheet.

As a company grows, it’s important to join together all of these various units with a central accounting system. GoCardless integrates with over 350 partners, including leading software including Chargebee, Salesforce, and Xero, to keep your workflow organized across multiple locations and branches.

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