What is a cost centre in SAP? What is a profit centre in SAP? And what are their differences?

In SAP, an organisation will create a cost centre to monitor all the expenses (planned/actual and ad-hoc) for a specific function which does not directly add any profit the organisation. For example, BMW may look to monitor the cost of different departments such as accounting, HR, IT, R&D, etc; or it can be for used for functional requirements, geographical locations or the services provided.

How to create a new cost centre in SAP?

1. Transaction code -> KS01;
2. OR Logical path – SPRO -> IMG -> Controlling -> Cost centre accounting -> Master data -> cost centre -> Individual processing -> Create
   1. Enter the new cost centre number and the valid dates for when it will be operational. You can also choose to reference the cost centre field to avoid confusion with other cost centres. You must bear in mind that in order to create a cost centre you must already have created a controlling area and have also assigned a standard hierarchy to the controlling area.
   2. If you then click the master data button you should come to the basic screen.
      1. Fill in the required fields as per company requirement
      2. In the control, tab select the fields as per company requirement

• Save. You now have your cost centre

A profit centre on the other hand accounts for both the costs and profits within a function in an organisation.

It is usually defined as a branch or division that lies within a company, and for the purpose of profit calculations it is ultimately being accounted for on an individual basis. Not only is it accountable for generating its individual results and earning which in practice enables the decision makers to review the product pricing and operating expenses, but ultimately it is a key source in understanding which units within the organisation are the most (and least) profitable.

A good example of different profit centres within an organisation is Apple, where you can have one profit centre for the MacBook Pro, another for the iPhone, another for the iPad, and so on.

How to create a profit centre in SAP?

1. Transaction code -> KE51;
2. OR Logical path – SPRO -> IMG -> Controlling -> Profit centre accounting -> Master data -> define profit centre
   1. Before creation you will need to ensure that you have the following prerequisite created
      1. Creation of control area and maintaining its settings
      2. Creation of standard hierarchy

• Creation of dummy profit centre

From the above we want to ensure that the following detail is inputted in the fields

• Basic data – here you enter all the information as per business requirements. Ensure that the status of the profit centre is inactive (no posting can be made) until all information is checked and approved. Only then should you activate it using the Note that once the PC is created only then can you divide the validity period into multiple analysis periods.

The key in both creation of cost centre and profit centre requires initial understand from the business on how the hierarchy should be set up, how to group all the cost/profit centres and understanding the need to create additional cost/profit centres.

Although interlinked, the main difference of a profit centre compared to a cost centre is that in a profit centre is it recording revenues – costs = profit/loss whilst a cost centre only records the costs associated with a project/task/function etc.

Whilst management try to understand how best to focus its resources to maximise profitability by using profit centres thus allocating more resources to highly profitable areas, cost centre, on the other hand, are managed internally with the purpose of improving operational efficiency.

As part of the SAP FICO training, Acquledge will facilitate in training students in understanding how financial accounting is closely integrated with controlling, and how to differentiate internal reporting to external reporting. Controlling is an essential module within SAP and Acquledge aims to ensure that students understand how configuring controlling will help a business understand how to ultimately become more profitable, whether that will mean an increase in revenue or decrease in costs.