Cost Centre vs. Profit Centre — What's the Difference?

Cost Centres and Profit Centres are two essential components within many organizations, but they serve different purposes. A Cost Centre is primarily concerned with monitoring and controlling expenses. Its main objective is to ensure that costs are kept within budgeted limits. In contrast, a Profit Centre looks beyond just costs. It focuses on both generating revenues and controlling expenses to determine its profitability.

When assessing the financial performance of a Cost Centre, the primary metric is usually the efficiency of cost management. If a department or project goes over budget, it's a sign that the Cost Centre is not operating efficiently. Profit Centres, meanwhile, are evaluated based on their ability to produce profit, balancing both income and expenses. If a division generates high revenues but also incurs high costs, its net profitability might be low.

The responsibilities of those managing Cost Centres and Profit Centres are distinct. Managers of Cost Centres are tasked with optimizing operations to remain within budget without compromising quality or output. On the other hand, managers of Profit Centres are tasked with strategic decisions, like setting pricing or expanding into new markets, to maximize profitability.

Accountability in Cost Centres and Profit Centres varies. While Cost Centre managers are held accountable for expenses, they typically don't have control over revenue generation. Profit Centre managers, in contrast, have authority and accountability over both revenue generation and cost control.

Finally, in terms of organizational structure, Cost Centres and Profit Centres can be departments, projects, or even entire divisions. However, while every organization has Cost Centres, not all have designated Profit Centres.