Profit Center vs. Cost Center: What's the Difference? - Indeed

Cost centers and profit centers work to reduce costs. Cost centers focus on long-term success through sustainable cost-saving approaches while ... FindjobsCompanyreviewsFindsalariesUploadyourresumeSigninSigninEmployers/PostJobStartofmaincontent CareerGuideCoronavirusJobResourcesFindingaJobMoreResumes&CoverLettersInterviewingStartingaNewJobResumeSamplesPay&SalaryCareerDevelopmentCareerPathsCoverLetterSamplesCoronavirusJobResourcesFindingaJobResumes&CoverLettersInterviewingStartingaNewJobMoreResumeSamplesPay&SalaryCareerDevelopmentCareerPathsCoverLetterSamplesCareerDevelopmentProfitCentervs.CostCenter:What’stheDifference?ProfitCentervs.CostCenter:What’stheDifference?ByIndeedEditorialTeamFebruary25,2022TwitterLinkedInFacebookEmailCopytoClipboardOrganizationsoftenrelyonmetricssuchascostcentersandprofitcenterstomakeshort-termandlong-termdecisions.Thesecentershelpbusinessesidentifyhowtheycanreducecostsandwhatstrategiescanbeusedtogenerateprofits.Inthisarticle,weexplainandcomparehowcostcentersandprofitcentersworkwithexamplesforeach.Whatisacostcenter?Acostcenter,alsocalledarevenuecenter,isagroupordepartmentwithinacompanythatperformsfunctionshelpfultobusinessoperationsbutdoesnotgeneraterevenuedirectly.Acostcenterdeterminesitscostsandcreateswaystoreducethosecosts.Costcentersarevaluablebyindirectlyenhancingacompany'sabilitytoearnaprofitbyimproving:OperationalefficiencyCustomerserviceProductvalueBrandawarenessLegalcomplianceBuildingmaintenanceTypesofcostcentersCostcentersmaytakeseveralforms,including:Productioncostcenters:Thesecentersrevolvearoundproductionandmanufacturingandcanincludethedepartmentswithinaproductionfacility,suchasassemblyareasandproductdevelopment.Servicecostcenters:Thesecostcentersincludedepartmentsorgroupsthatprovideasupportservicetotheorganization,suchasmaintenanceandcleaningpersonnel,customerserviceandqualitycontrol.Administrationandsalescostcenters:Thesecentersincorporatedepartmentsorgroupsrelatedtobusinessorofficeadministrationandproductsales.Examplesofcostcentersinclude:HumanresourcesAccountingMarketingITdepartmentLegaldepartmentQualitycontrolManagersofcostcentersdonotmakecompany-widefinancialdecisions,suchasdeterminingpricesoraddingdepartments.Theirroleinvolveskeepingdepartmentexpensesatorbelowbudget.Readmore:WhatIsaCostCenter?Definition,FunctionandExamplesCostcenterperformanceCostcenterperformanceismeasuredbydeterminingcostvariance.Thisinvolvescomparingthestandardcostandstandardquantityofaproduct—apre-determinedamountdefinedbymarketanalysisandhistoricaldata—versustheactualcostandquantityrequiredtoproduceaproduct.Costcentersusethesefigurestoanalyzetheirprocesses,including:OrderingmaterialsandpartsDetermininglaborneedsIdentifyinginefficienciesReevaluatingtargetpricesandquantitiesCostvarianceincludesbothpricevarianceandquantityvariance.Totalcostvariance=pricevariance+quantityvarianceExample:Consideraclothingmanufacturer.Thecompanybudgets$5toproduceitsmostpopularshirt.Thismeansthestandardcostis$5.Thetargetquantity—orstandardquantity—toproducetheshirtsis1,000yardsoffabricperyear.Inoneyear,thecompanyuses1,100yardsoffabricandproducesshirtsfor$4each.Todeterminetotalcostvariance,firstdeterminepricevariance.Pricevariance=actualquantityx(actualprice–standardprice)PV=1,100x($4-$5)PV=1,100x(-1)PV=-$1,100Theactualpriceislessthanthestandardprice,meaningthisisafavorablepricevarianceof$1,100.Thenegativefigurerepresentsthatthecompanyspentlessthanitanticipated.Next,determinethequantityvariance:Quantityvariance=standardpricex(actualquantity–standardquantity)QV=$5x(1,100–1,000)QV=$5x(100)QV=$500Theactualquantityismorethanthestandardquantity,meaningthisisanunfavorablequantityvarianceof$500.Thepositivefigurerepresentshowmuchthecompanyusedbeyonditstargetedquantity.Remembertheformulafortotalcostvariance:TCV=pricevariance+quantityvarianceForthisexample,totalcostvariance=(-$1,100)+$500.Thisbecomes$500-$1,100,whichis-$600.Again,thenegativefigureindicatesthecompanybeingunderbudgetinthisarea.Thisisafavorabletotalcostvarianceof$600forthecostcenter.Related:StandardCosting:DefinitionandHowitWorksWhatisaprofitcenter?Aprofitcenterisadivisionordepartmentofacompanythatgeneratesrevenueandprofitsdirectly.Itisoftenmanagedasaseparatebusiness,responsibleforminimizingitscostsandmaximizingitsprofits.Profitcentersassistthecompanyby:MakingmoneyCalculatingreturnoninvestmentsProvidinginformationforfinancialdecisionsBudgetingTypesofprofitcentersProfitcentersvaryinhowindependentlytheyrunfromanorganization.Thetypesofprofitcentersinclude:Adepartmentwithinanorganization:Profitcenterscanbein-housedepartmentsthatgenerateincome,includingsalesdepartments.Anindependententity:Profitcenterscanalsobeseparate,standalonebusinessesthatbringinrevenuefortheorganization,suchasarepairshopinabikestore.ProfitcenterperformanceYoucanmeasureprofitcenterperformancebycomparingbudgetedcoststoactualcosts.Forexample,consideracellphoneserviceproviderthatbudgets$30,000foroperatingexpensesforitsrefurbishedcellphonesandaccessoriesshop.Iftheshop'sactualexpensesarelessthan$30,000,theshopisdoingwell.Iftheshop'sactualexpensesaremorethan$30,000,thecompanyshouldevaluatetheprofitabilityoftheshop.Examplesofprofitcentersinclude:RestaurantsinhotelsGiftshopsinhospitalsSpecializeddepartmentsinalargeretailstoreIndividualproductlinesinamanufacturingcompanyRelated:HowtoPrepareanAnnualBudgetforaCompanyCostcentervs.profitcenterCostcentersandprofitcentersappearindecentralizedcompanies,whichdelegatedecision-makingtolower-levelmanagersratherthanrelyingonthetopexecutivestomakeallcompanydecisions.Bothtypesofcentersincurcoststooperate,butonlyprofitcentersgenerateincome.Costcentersandprofitcentersworktoreducecosts.Costcentersfocusonlong-termsuccessthroughsustainablecost-savingapproacheswhileprofitcentersaremoreconcernedwithcreatingstrategiesforshort-termrevenue.Agivenprofitcentermaycontainseveralcostcenters.Forexample,consideralargemanufacturingcompany.Thecompanymaychoosetocreateprofitcentersfromeachproductlineitproduces.Eachproductlinemayrelyonthefollowingcostcenters:MaintenancedepartmentsAccountingdepartmentsITdepartmentsThetypeofin-depth,specificinformationgeneratedbycostcentersistypicallymostbeneficialforinternalsourcesratherthanexternalsources.Forexample,itisnotrelevantforataxingauthoritytoknowthesalariesofacompany'smaintenancestaff.Companiesusecostcenterdataforin-housetasks,suchas:MakingdepartmentalbudgetchangesEvaluatingpartssuppliersCreatingmarketingplansDefiningprocessesandprotocolsImprovingproductqualityTheinformationprovidedbyprofitcentershelpsorganizationsmakefar-reachingfinancialdecisions,including:PricingstrategiesInvestmentdecisionsStaffingchangesEliminatingoraddingproductsandservicesBrowsemorearticlesWhatIsUXDesign?WhatIsOrganicContent?(PlusBenefits,QualitiesandTips)WhatIsTreasuryManagement?(WithDefinitionandBenefits)ProfessionalCoach:Definition,DutiesandAdvantagesWhatIsUserAcquisitionandWhyIsItImportantforBusinesses?WhatIsaPre-collegeProgram?ADefinitiveGuideWhatIsRecruitment?AComprehensiveGuideWhatToDoifYouFeelThreatenedatWork(WithTips)12ValuableWirelessNetworkingCertificationsToConsiderWhatIsUTMTracking?(PlusHowToSetUpTrackingin4Steps)WhatIsProjectSlippage?(PlusHowToPreventIt)FAQ:WhatAreSomeoftheMostImportantAgileMetrics?