Final answer:
Profit centers are involved in earning revenue and managing costs, while cost centers solely focus on incurring costs. For performance evaluations, profit centers may use ROI, and understanding the difference between accounting profit (explicit costs) and economic profit (explicit and implicit costs) is crucial for measuring success.
Step-by-step explanation:
The primary difference between profit centers and cost centers within an organization is that profit centers are responsible for revenue generation as well as controlling costs, allowing them to calculate profit. In contrast, cost centers only incur expenses and are not directly responsible for generating revenue. To evaluate their performance, profit centers might use return on investment (ROI) criteria because they can impact both revenues and costs. Cost centers, on the other hand, are often assessed based on how well they manage and contain costs, since their primary function is to provide support and services within the organization.
Explicit costs refer to direct, out-of-pocket payments, such as wages or material costs, while implicit costs include opportunity costs that are not paid directly but represent potential income lost by not investing the company's resources elsewhere. Accounting profit considers only explicit costs whereas economic profit accounts for both explicit and implicit costs, which is essential for a company to understand its true financial performance. Revenue is the total money received from business activities, whereas costs are the expenses incurred in the process of generating revenue.