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Functionality of Profit Center and Cost Center

Hi,

I am unable to understand the functionality of Profit center and cost center, I know that cost center represents area within an organization for which you will like to see the expenses for a particular time period. for example in an organisation we have three cos centers Accounts, HR and Admin. whenever you post an accounting document in FI you will specify the cost center to which the expense relates. but in some cases when you post an expense and give the relative cost center the profit center is also driven by the system. why is this behavior? i mean i have posted an expense not an income then why is system driving the profit center as well?

Profit centers are used if you want to see the profit of different area of your organisation. in what kind of postings we use profit center? and if we could use profit center to draw income and loss for a specific area why do we need segment reporting? and what is the difference between Segment and Business area. what i understood from their definition is that they are both same and use for same purpose.

I am totally lost in these concepts. please some one help me out with an example. i am stuck at this point. some one please clarify my concept of Profit Center, Cost Center, Segments and business area please.😢

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2 Answers

  • avatar image
    Former Member
    Apr 02, 2014 at 10:07 AM

    Hi Yaqoob,

    Cost center and profit center both are used for internal reporting purpose, now I will explain you purpose of the cost center and profit center.

    1) Cost center : Cost center is a master record and used for internal reporting purpose and here we can book cost a departments wise like Admin, HR , production etc.

    2) proft center : Here, you can draw the financial statements like balance sheet and profit and loss statement. The expenses will flow from the cost center and revenues will flow from the material master.So here cost center linked to the profit center and profit center linked to the material master

    Now the difference B/w Segment and Business area let me give one example,

    Example :

    Assume "USA" is the segment

    In USA differeent states are there like "Califonia, Newyork, Washington" Assume these are Business areas.

           Based on the client requirement you can draw the report at "USA" region wise and If you want to draw the reports Business area wise you can.

    Regards

    Dileep

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    • Hi

      you need to know first that the name of cost center and profit center really stand for there meaning ..

      cost center is represent cost ( attracting & generating ) unit.. if you need to analysis you company expense per divison , you shall apply the concept of cost center . you can divide the company incurred cost in two main division ( direct cost & indirect cost .)

      Direct cost . like production lines.. which the incurred cost can be directly charge to it.

      Indirect cost : Like Finance Dept. Cost & HR etc... which will need its costs to be distributed to the direct cost later through CO module to determine the product cost ( Direct & Indirect cost & Overhead)

      Profit Center : is the revenue generating unit in the organization.. which represent the rev. of particular dept. can that be assigned to..

      and i agree with Mr. Dileep that you can prepare financial statement using profit center in case you activate the document splitting.

      this answer why SAP make a connection between cost and profit center. 

      COPA reports in CO module depend on the right definition of cost & profit center ..

      both of them are not preventive for over spending .. not like internal order or WBS .. but both of the are the lowest level of expense & rev. analysis and both Internal order & WBS should be assigned to cost or profit center in the background

      regarding business area & segment .. Mr. Dileep give you right description of the usage of them .

  • avatar image
    Former Member
    Apr 02, 2014 at 09:00 PM

    Hi,

    Cost center & Profit Center are organizational units   within the enterprise structure , created for better internal control.

    As the name suggests Cost Center  is  the lowest level  of the organizational unit representing a defined location of cost incurrence or otherwise to which you can meaningfully assign the cost(both direct & Indirect).


    Profit Center is an organizational unit  in accounting  ,where management would require to see the profitability & fix the responsibility. It may be each plant/division of the company .

     

    If you consider the Plant is the Profit center, you can take the various deptts in the Plant as cost centers. you can draw a balance sheet & profit & loss account statement at profit center level but this will be for your internal use.From this you can know the ROI on particular area. Profit centers are assigned inside the cost center so when you update cost center, profit centers are updated automatically.


    Where as Segments are used for legal reporting of your accounting standard as per IFRS. Both Business Area & Segments are more or less same with some technical difference.


    Business area  is a free organizational unit. It can be derived through cost center or can be entered manually.


    But segment is a dependent organizational unit. It is defined & attached inside the  profit center master data. It can’t be entered manually.


    SAP suggest to use the Segment concept.


    Thanks & regards

    Deepak

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