What is a Cost Center?

A cost center is a reporting unit of a business that is responsible for costs incurred. An example of a cost center is the maintenance department of a business, where its manager is only rated on the amount of costs incurred to maintain facilities and equipment at a predetermined level. Similarly, the accounting, finance, information technology, and human resources departments are all treated as cost centers.

What is a Profit Center?

A profit center is a reporting unit of a business that is responsible for profits generated. An example of a profit center is a subsidiary, which is responsible for the amount of sales generated, as well as all costs incurred. Similarly, a country division is also treated as a profit center, as may a product line.

Comparing Cost Centers and Profit Centers

There are several important differences between cost centers and profit centers, which are as follows:

Scope of responsibility. The main difference between the two concepts is that a cost center is only responsible for its costs, while a profit center is responsible for both its revenues and costs.
Organizational complexity. Another difference is that cost centers tend to be organizationally simple, while profit centers are more likely to have a complex structure.

Both concepts are used in a business where senior management wants to drive responsibility down into the organization, so this cannot be considered a difference between the two concepts.