Profit Center and Business Area

This article will help you understand the difference between a profit center and a business area in SAP system.

Profit Center is an organizational unit that is management-oriented use for internal controlling purposes. Structuring your company up into profit centers allows you to monitor and analyze areas of responsibility and to delegate responsibility to each decentralized units, thus treating these profit centers as "companies within your company". Each profit center is assign to one Controlling Area. Balance sheet and income statements can be generated for each profit center, thus allows you to generate a segmental reporting.

On the other hand, business area is an organizational unit in financial accounting that represents a separate area of operations or responsibilities within your organization. It is mainly use to facilitate external segment reporting across company codes, covering the company's main areas of operation e.g. product lines, branches, etc. Balance sheet and income statements for each business area can also be generated.

The indespensable difference between a profit center and a business area is that the former is use for internal control; whereas, the latter is more geared toward to an external viewpoint.

Cost Center vs Internal Order

You might be asking, what's the difference between a cost center and an internal order?

A cost center is use to monitor and trace who incurred a specific cost from your organization. It is use for fixed reporting for a long time period as part of your organization structure. The definition of a cost center can be based on: Functional requirements; Allocation criteria; Physical location; and Responsibility for costs.

Whereas, an internal order is a tool use to monitor costs, and in some cases, use to monitor revenues of your organization. It can be used for the following purposes: Monitor the costs of a short-term jobs; Monitor the costs and revenues of a specific service; and Ongoing cost control.

If an order is REAL order, you post costs to an internal order not to a cost center. Otherwise, if it is a STATISTICAL order, costs are posted to a cost center and to an order simultaneously.

Two Types of INTERNAL ORDER

An internal order is use to accumulate costs for a specific project or task in a specific time-duration. Therefore, an internal order is use for a short period with a specific deadline.

Purpose:
It can be used to group all the costs/expenses that could be incurred to plan and hold a marketing event, say over a 2 month period. And then the order can be settled periodically to a cost center.

Types and Difference:
Then, what are the two types of internal order? It has two main types, namely; REAL and STATISTICAL order.

The difference between REAL and STATISTICAL is that, real order is required to be settled to a cost center. When an order is a real order, it is where you post a cost during posting in FI and in other modules. Example; when you prepare a purchase order for a marketing event and charge it to an order, the cost is post to an order not to a cost center. And the cost accumulated in the order are required to be settled to a receiver cost center.

WHEREAS, a STATISCAL order can not be settled to a receiver cost center. Being a statistical is specified during set-up of an order. When you post costs in FI, you post simultaneously to a cost center and to a statiscal order. No settlement of costs accumulated in the statiscal order at month-end.

More tips to follow!

Cost Element and Revenue Element

Cost and revenue elements can be classified into primary and secondary cost elements. What are the differences of the two? Well, let's see through the following discussions and insights:
PRIMARY COST ELEMENTS
Primary cost and revenue elements are the elements that transfer relevant cost flows from Financial Accounting to Controlling. This enables you to reconcile the cost flow data between FI and CO. A pre-requisite in creating a primary cost and revenue elements is that; there should be an existing P&L accounts in FI. Otherwise, the system won't allow you to create such cost elements. All Profit and Loss (P&L) accounts in FI should have cost and revenue elements in CO.

SECONDARY COST ELEMENTS
Secondary cost elements are used only to settle costs accumulated in a cost object e.g. cost center to final cost object receivers e.g. other cost centers. These cost elements can be created only if not existing in GL accounts.

"Purpose of Controlling and Its Integration"

PURPOSE

What's the pupose of Controlling module of SAP? This is a very good question that needs a basic answer and explanation.

Controlling (or Management Accounting) provides information mainly for management decision-making. It facilitates coordination, monitoring and optimization of all processes in a company. This involves recording both the consumption of production factors and the services provided by an organization.

The main task of Controlling is PLANNING. Variances (differences) can be determined by comparing actual data with plan data. The variance calculations enable you to control business flows.

INTEGRATION

Controlling (CO) and Financial Accounting (FI) are independent components in the SAP system. The data flow between the two components takes place on a regular basis.

All data revelevant to cost flows automatically originate from Financial Accounting to Conrolling. At the same time the system assigns the costs and revenues to difference Controlling account assignment objects, such as cost centers, business processes, projects or orders. The relevant accounting in Financial Accounting are managed in Controlling as cost elements or revenue elements. This enables to compare and reconcile the values from Controlling and Financial Accounting.

Financial Accounting vs Controlling

In accounting point of view, Financial Accounting (FI) and Management Accounting/Controlling (CO) are two branches of accounting. Each branch has different purpose, serves different type of information users and uses different types of data and information. The following clearly distinguish the two branches of accounting:

Financial Accounting output such as the financial statements generally used by external users (other than management). These users could be the stockholders, government, employees and banks. Whereas, Management Accounting (Controlling) purposely serves the management of the Company. Example of controlling reports are cost center report (cost per dep't), profit center report and profitability analysis report.

Financial Accounting uses general data and information. To relate to SAP FICO, the basis of the preparation of financial statements is the general ledger. And postings to GL are general in nature e.g. accounts receivable - trade account is not segregated into source. Whereas, Management Accounting uses specific type of data and information. In SAP, example of these reports are cost center report, profit center report and profitability analysis. The above reports contain specific information e.g. salaries expense is segregated per project and/or per department.

Both two branches of accounting are properly addressed and automated in SAP. Standard reports are available and readily available to use.