Difference between Cost Centre and Profit Centre

Responsibility accounting is management accounting where all the company’s management, budgeting, and internal accounting are held responsible. The primary objective of responsibility accounting is to hold responsible all the concerned departments of any particular function. The focus of responsibility accounting is mostly on responsibility centres. Different types of responsibility centres are being set up under responsibility accounting and every responsibility centre has different goals assigned to them which they have to fulfil in order to contribute overall growth of the organization. A responsibility centre is a functional business entity that is given definite objectives and goals, dedicated personnel, procedures, and policies as well as the duty of generating a financial report. Some basic responsibility centres that all organizations generally need are Cost Centre, Profit Centre, Revenue Centre, and Investment Centre.

What is Cost Centre?

A cost centre is responsible for cost control. The main objective of the cost centre is to minimize cost. The cost centre’s prime work is to check the cost of an organization and to limit the unwanted expenditure that the company may acquire. Costs, in this respect, are basically classified as controllable costs and non-controllable costs. Controllable costs are the costs that can be controlled by the organization. Uncontrollable costs are the cost that can not be controlled by the organization. The concerned centre is made responsible and accountable for only controllable expenses. So, it is important to distinguish between controllable costs and non-controllable costs. The performance evaluation is done on the basis of the actual cost that occurred and the targeted cost.

Some types of costs centres are:

• Production cost centre
• Personal cost centre
• Service cost centre
• Impersonal cost centre
• Process cost centre
• Operation cost centre

What is Profit Centre?

A profit centre refers to a centre whose performance is measured in cost and revenue both. It contributes to both revenue and expenses, resulting in profit and loss. Profit occurs when revenues are more than costs and loss occurs when costs are more than profits. The profit centre is accountable for all the actions associated with the sale of goods and production. The principal object of a profit centre is to generate and maximize profit by minimizing the cost incurred and increasing sales. The accomplishment of a profit centre is estimated in terms of profit growth during a definite period.

Difference between Cost Centre and Profit Centre

Basis	Cost Centre	Profit Centre
Meaning	Cost Centre is responsible for controllable costs.	Profit Centre is responsible for both costs and revenues.
Responsibility	Cost centre is responsible for cutting costs.	Profit centre is responsible for cutting costs and increasing revenue, thus increasing profits.
Approach	Short term approach is followed.	Both short-term and long-term approach is followed
Complexity	Cost centre is less complex as it focuses only on the cost.	Profit centre is more complex as compared to cost centre because it focuses both on the costs and revenues.
Scope	The scope is narrow.	The scope is wide.
Generation of profits	Cost centre does not directly take part in generation of profits.	Profit centre directly takes part in generation of profits.
Area of operation	The area of operation is internal.	The area of operation is external.