Decision on Profit Centers in Organisation structure

[Former Member]

Hi Gurus,

Appreciate if you can help me with finalization of profit centers. Please find below scenario:-

We have one company code and one controlling area. Client is doing two types of businesses which is Distribution channel in SD and Plant in MM.

Now there are 4 types of products, client is dealing in, which are divisions in SD module.

Requirement is P&L on Dist.Channel and product line wise. Now, How and what profit centers we should create?

Suggestion from other consultant is that We will create One profit center for one distribution channel and Profit center group for other distribution channel. 4 profit centers under this profit center group which are reflecting different types of projects clients are having under this distribution channel. For product wise report, 4 different GL accounts created for each product.

I am not finding this suggestion correct........

What i am thinking is we should have 8 profit centers 4 for each product under 1 plant and 4 for each product under another plant. My only doubt in this is, which profit center will we enter in different projects?? Not sure will they have projects on product basis, if yes then we can enter the profit center of that product from the second plant???

I hope you understood my scenario and please suggest your options. This will be a great help for me.

Thank You

[Former Member · Accepted solution]

Hi Mohit,

Few more questions in order to answer this clearly..

1. Is COPA in scope?

2. At what level do you need to see the Balance sheet. Profit center enables you to see balance sheet at one level below your company code and is also used when you want to calculate the ROI.

You have two plants representing two business lines and under each business line you have multiple products..

So now, few more questions..

1. At what level are you able to seggregate your expense booking in the system.. like Salary, Wages, electricity, Maintenance, Depreciation etc.. Are you able to book at the product level which I most probable think that your answer will be NO

2. You mentioned the management wants to see P/L account at the product level..If the answer to above question is Yes, only then you will be able to generate P/L/ account at the product level by defining Profit centres at the Product level.

Solution suggestion:-

Assuming you cant identify your expense booking at Product level, what you can get is a Profitability statement, and not a P&L Account

There is a difference between P/L account and profitability statement.. In P/L account, you see each expense booked at the level of GL but in profitability statement you would get a summarized picture as  Sale ( - ) Discounts ( - )  Raw Materails ( - ) Mfg Overhead etc.. In Profitability statement you dont see expense bifurcation at the GL level.. So it is very important to know what is the need of the management. - P&L or Profitabilty statement??

If the req of the managmnt is to see only profitablilty statement at the product level and assuming COPA is in scope, then you can get Profitability statement at the product level / Dist Channel / Division and Plant level  from COPA as Dist channel, Division and material are all available in COPA.

In this case, you dont need a PC at all. Unusual it may sound, but YES, you can avoid it

If at all you want to use Profit centre, then you can create your two plants as Profit centre as I assume that asset, liabilities etc..will be possible to identify at plant level and there would be separate set up for two business lines

Your idea to create 4 PCs under one Plant - Ask yourself can you identify the Fixed assets, Stocks, Customers and Vendord etc at PC (Product line) level. While you may identify Customers and Vendors easily, there may be common stocks and fixed assets which you may not be able to seggregate at PC level.. Hence, create your PC at a level where you can identify all your expenses, revenues, Assets and LIabilities, because the objective of PCA is to caluclate ROI

So, in short, there are a lot of factors that would decide the design of Profit centre..

To summarize,

1. If you are able to book all expenses at the product level and the management wants to see Product wise P/L... then go ahead and create products as Profit centre

2. If (1) is not possible, then focus on Prof statement and not P&L

3. If Management wants to just see Profitability statement and COPA is in scope, then you dont need any profit centre, because all the dimensions are available in Std COPA system

4. If still you want to use PC, then decide at what level do you want to see and book balance sheet items in the system. In your case, I guess it would be at Plant level.. so create two business lines as Profit centre.

Hope I have clarified and not confused you...   🙂

BR,

Kavita

[Former Member · Accepted solution]

Thank you so much for your replies.....

Special thanks to kavita for such a detailed explaination.

To answer your question, COPA is not in scope.

If we talk about profit centers which are currently proposed, we cannot get Profit and loss on product level.

Please correct me if i am wrong, What if we create 4 business area for 4 different products? Can we get report on product level then? But yes while doing any entry, user have to enter the relevant business area, which means user should know at the time of booking correct business area? Other doubt is if that particular expense is related to more that 1 product then how will user enter that entry for two business areas???

Thanks and Regards,

[Former Member · Accepted solution]

Hi Mohit

Its not a question of using Busn Areas or PC.. It is about whether you can identify the expenses at the time of booking.. If you cant identify, then dont go for product wise BA or PCs

If you create 4 PC or BA for the Products, then you will have to create Common PCs or BAs as well.. i.e. Common for BA/PC 1 and 2, BA 1 and 3, 1 and 4, then 2 and 3, 2 and 4 and so on... Again you will have to create Common CC for those Common BAs or PCs.. That is going to complicate the whole structure..And you will have to allocate from Common pool to the specific BAs or PC, which is again on approx basis and not actuals

I would strongly advise to go for COPA, as that would simplify the whole structure.

If that is not there, then you have no choice but to create 4 PCs under each plant.. But think  about the common pool of expenses I highlighted above.. If most of the expenses are going to land in a common pool, better create a Common PC and assign all the cost centers to this Common PC.. At the month end, allocate the expenses from Common CC to Specific CC and then proceed with the process of absorbing the cost from those CC into the Products

Br,

Kavita Agarwal

[Former Member]

HI Mohit,

If COPA is not in scope and client required B/S & P/L at product level and Dist. Channel level you have to consider product as profit center (the lowest node for which you want to generate P/L & B/S)

and distribution channel as PC Group. Financial transaction will book at PC level and you can get the P/L at PC level as well.

However before deciding please consider suggestion given by Kavita also.

BR. Josh

[ajaycwa1981]

Hi Mohit

The above answer is a perfect one, which explains it from accounting angle

I will touch upon the aspect not covered above.. Your Projects!!

What PC would you assign in a Project depends on what for it created and how you define your PC.. For example, a Prject is created for Product A and you have PC defined at PLant level, then assign the PC in the Project depending on which plant it will get executed from

Br, Ajay M

[Former Member]

Hi..

I think that if you want to display p&l report related to dist.Channel and product line,
you can only use co-pa report with distribution channel and material group
characteristic. 

If you want to display a report included P&L, asset and debt, you should use PCA report.

In this case, according to your company level to divide asset and debt into each profit center,  you can create profit centers.