Cost centre: a unit of a business that incurs costs but does not make any profit. These costs are clearly attributed to the activities of that department.
Profit centre: a unit of a business that incurs both costs and revenues.
Frequently Asked Questions: Cost Centre vs. Profit Centre
What is a Cost Centre and a Profit Centre?
In management accounting, Cost Centres and Profit Centres are ways of organizing and evaluating different parts or departments of a business:
- Cost Centre: A department or function within an organisation that incurs costs but does not directly generate revenues. Performance is measured primarily by how well it controls its costs compared to a budget or standard.
- Profit Centre: A department or division that incurs costs AND is directly responsible for generating revenues. Performance is measured by its ability to generate profit (revenue minus costs).
What do you mean by Cost Centre and Profit Centre?
It refers to dividing a business into segments for better accountability and control. A Cost Centre is a segment where the manager is accountable for expenses but not sales (e.g., the IT department). A Profit Centre is a segment where the manager is responsible for both expenses and revenues, and therefore, the resulting profit (e.g., a specific product line or a regional sales office).
What is the difference between Cost Centre and Profit Centre?
The fundamental difference lies in their responsibility and how their performance is evaluated:
- Cost Centre: Focuses solely on **controlling expenses**. Evaluation is based on budget adherence and cost efficiency.
- Profit Centre: Focuses on both **generating revenues and controlling expenses** to achieve profitability. Evaluation is based on the profit generated.
Is HR (Human Resources) a Cost Centre or Profit Centre?
Generally, HR (Human Resources) is treated as a **Cost Centre**. The HR department incurs significant costs (salaries, benefits, training, recruitment expenses) but does not directly generate revenue for the company. Its performance is typically evaluated based on managing these costs effectively and contributing to overall organizational efficiency and employee satisfaction, rather than direct profitability.
How are Cost Centres and Profit Centres used in systems like SAP?
In Enterprise Resource Planning (ERP) systems like SAP, Cost Centres and Profit Centres are key organizational units used for controlling and reporting. Transactions involving costs are assigned to specific Cost Centres, allowing for tracking and budgeting of expenses. Profit Centres are used to allocate both revenues and expenses, enabling reporting on the profitability of specific business segments. This structure facilitates detailed financial analysis and performance management within the system.
