1)In business, an operating unit is either making money or it’s detracting from a company’s profits. In simple terms, it’s the difference between a profit center and a cost center. 2)Conceptually, a business unit is considered a profit center when “it’s set up as a small business — it has its own revenue and profit targets,” 3)On the flip side, a company unit such as the human resources department doesn’t earn revenue or turn a profit. Its objective is to hire, train and support the company’s employees, and there’s a cost to the company to run the unit. As such, human resources is typically viewed as a cost center. 4)IT departments traditionally were set up as cost centers. An IT organization would charge back costs to a business unit. For example, IT would charge a commercial loan division of a bank for monthly transaction processing costs or mainframe use costs. But it wouldn’t bring in a profit because the division would be charged at cost. In some cases, those costs may be absorbed by the company or as part of a business unit’s overhead. 5)If an IT department is a cost center, “the rest of the business views you as a burden” 6) However, it’s common for IT organizations to be set up as cost centers in highly-regulated industries, such as financial services or electric utilities, “to show regulators where the costs are” by charging IT costs to individual business units 7)Other companies, such as The Hartford Financial Services Group in Hartford, Conn., have elected to set up their IT organizations as profit centers with a goal of generating zero profit 8)Some CIOs think their IT departments should remain cost centers. “Our core competency [in IT] is to help our company build aircraft structures, not to code [enterprise resource planning] systems, so I could not see us as a profit center”
07 June 2012
The Differece Between Cost Centre and Profit Centre. (Cost Accounting)
Cost centres are the smallest segment of activity or area of responsibility for which costs are accumulated or ascertained. Where as profit centres are that segment of activity which is both responsible for Revenue and expenses and disclose profit of a particular segment of activity.
Cost centres are created for accounting convenience, where as profit centres are created to delegate responsibility to individuals.
A cost centres does not have target cost, but efforts are made to minimize cost. But each profit centre has a profit target.
There may be number of cost centres in a profit centre. All profit centres are cost centres but all cost centres are not profit centres.
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