A Simple Explanation About Profit Center & Cost Center In Accounting

In this article, we will help you understand how the business concept for-profit center & Cost center A profit center is an activity or a process in our business that can be measured and directly impact the bottom line. A cost center does not have a direct impact on the bottom line of our business. The difference between the two is huge! So why are these terms used to describe different parts of a business? Let’s look at what each one means and how you can make sure you use them correctly in our company.

Introduction to profit center & cost center

Profit center accounting’s primary purpose is to determine profit within the area of responsibility. We can further analyze the fixed assets of our company by assigning balance sheets items (Fixed assets and Receivables and Payables. Stocks) to profit centers. Profit centers can be divided according to product lines, geographic factors (regions, offices, production site locations), or function (production and sales). Our business can create profit centers by assigning profit centers to various master data (materials cost centers, orders cost centers, projects, sales orders, assets, and cost objects).

Segments of profitability and efficiency Each profit center is assigned an administrative unit control area.

Cost Center gives information about the costs incurred for your business. SAP allows you to assign Cost Centres to specific departments and managers within your company. Marketing, Purchasing, Human Resources, FinanceSales & Distribution, and Information Systems are all examples of Cost Centers.

What is Profit Center?

A Profit Center in accounting is an organizational unit that represents a management-oriented organization and serves internal control. Analyzing profit center operating results can be done using either the cost of sales or the accounting period

A Profit Center is an organizational unit that allows for SAP Controlling. It’s used to control internal processes. We can create Profit Centers based on our organizational needs. This allows management to identify the responsible areas and will enable us to divide them. This will enable us to give decentralized units authority and allow them to manage and control them. The Profit Center’s balance of revenues and costs is the responsibility of its responsible person. Profit Center Accounting can assess a particular unit within a company. A branch office, a plant, a function, a product, a division, or a product group could all be examples. To analyze profit and loss internally. Profit Center Accounting uses data from many company operations, such as accounting, logistics, and supply chain management. We assign Profit Centers during master data design to other account assignment objects such as Sales Orders and Production orders, Cost Centers and Internal orders, Projects, etc., to which revenues and costs are posted.

Profit center
Profit center

The SAP system does not require that the user enter the Profit Center. Data is instead derived from internal orders, cost centers, material masters, etc. SAP S/4HANA Finance Consultants determine Controlling area settings to use the functions in Controlling or Profit Center Accounting. Different Profit Centers can be found in other Controlling areas. It helps prepare P&L for various decisions; each Profit Center head needs information. The general information required by the group head (Controlling is at level) is essential. To make choices, different Profit Center CEOs require further information. They are in charge of particular responsibilities.

Why a Profit Center is required?

Profit Center’s primary objective is to be an autonomous organizational unit that operates in the market independently, takes responsibility for its revenue and costs, and can be used to become an investment center or a company within a company. Internal and external accounting might become more integrated with the profit center concept, and it acts as a link between two accounting concepts. Profit Center Accounting answers the following questions:

  • What is the revenue?  
  • What is the cost to manufacture goods? 
  • What is the contribution margin? 
  • What are the administrative and sales expenses? 
  • What is the operating profit? At the profit center level, you can do return on investment (ROI), economic value added (EVA) and cash flow analysis.

How to Create a Profit Center?

IMG Path is as follows

Display Menu Path SAP IMP ➔ Controlling➔ Profit Center Accounting➔ Profit Center➔ Define Profit Centre

Profit center tcode in sap

  • Create a profit center -KE51
  • Change a profit center-KE52
  • Display a profit center -KE53
Profit center vs cost center
Profit center vs cost center
profit centre tcode
profit centre tcode

The next screen enter all required entries, click on save

Profit center table in sap

  • Table of Profit Center Master Data -CEPC
  • Table of Profit Center Master Texts -CEPCT

What is Cost Center

A cost center can be defined as an element of an organization that directly or indirectly increases the company’s profit. Marketing and Customer Service are two examples. You can categorize a company as a profit, cost, or investment center. Cost is a simple concept to grasp.

A cost center is a business division that raises the company’s expense but not the profit. Examples of cost centers include customer service, research and development, and marketing. Businesses may categorize business units as profit centers, cost centers, or investment centers. Cost centers can be easy to classify as cost centers, simple divisions. Cost centers can encourage managers to underfund their units to gain a competitive advantage. This could have a negative impact on the company as a whole (e.g., lower sales due to poor customer service). The cost center is likely to be a target for budget cuts and rollbacks, as it has a negative effect on profit. Cost considerations are often a driving factor in operational decisions made by contact centers. Because indirect profitability is difficult to quantify, managers often find it hard to justify equipment, technology, and staff investments. Sometimes, business metrics quantify the value of a cost center and link costs and benefits to the overall organization. For example, in a call center, measures such as average handle time, service quality, and cost per call can be used in conjunction with other figures to justify present financing.

Why is a Cost Center required?

Cost centers are the locations where costs are incurred. It can be set up based on functional requirements, areas of responsibility, allocation criteria, geographic locations, activities, or services provided. Its purpose is to provide cost-related information in Overhead Cost Accounting. Cost centers are then grouped into decision-making, control, and responsibility units. Cost Center is placed in the cost center standard hierarchy to map this structure.

How to Create a Cost Center ?

IMG Path is as follows:

SAP IMG Menu➔ Controlling➔ Cost Center Accounting➔ Master Data➔ Create Cost Center

Cost Center
Cost Center

Cost Center Next screen

  • Enter the new cost center number
  • Enter the validity dates of new cost center Optional – in the reference section
  • In the cost center

Cost center tcode in sap

  • Create a Cost Center -KS01
  • Change a Cost Center -KS02
  • Display a Cost Centre -KS03

Cost center table in sap

  • Cost Center Table -CSKS
  • Cost Center Text Table-CSKST
  • Cost element table -CSKB

There are two types of organizations, profit centers, and cost centers. Profit centers focus on generating revenues for the organization and cost centers focus on reducing expenses.

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