3.9.1 (HL)—Cost and profit centres

A cost centre is a department or unit judged mainly by the costs it controls. A profit centre is judged by both the revenue it generates and the costs it incurs, so its performance can be compared through profit.

The distinction gives managers a clearer budget and a defined area of responsibility. It can speed local decisions and reveal which units need support, but costs shared across products or locations may be difficult to allocate fairly. A manager should not be blamed for a cost they cannot influence.

For example, a retailer can treat each store as a profit centre while head-office IT and human resources operate as cost centres. Store managers can respond to local demand, while the centre manager monitors whether a sales gain came from genuine performance or simply higher spending.

A profit centre is not automatically a separate business and a cost centre is not ‘unproductive’. Both are control units; the useful question is whether the chosen measures match the manager’s actual decision rights and the organisation’s objectives.