Concept of Cost center and Profit center in SAP

Cost center and Profit center are organizational units within the enterprise structure which are used for management reporting i.e Internal control.
What is Cost center?
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).
Any business can be classified in three way:
Cost center hierarchy looks like the below

If we need to analyze company expanse per division wise we need to apply the concept of the Cost center on division level. There would be two types of cost.
  1. Direct Cost: Production of a material in which the incurred cost can be directly charge to it.
  2. Indirect Cost: 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)
What is Profit center?
Profit Center is an organizational unit in accounting, where management would require seeing the profitability & fix the responsibility. It may be each plant/division of the company.
It lets you determine profits and losses using either period accounting or the cost-of-sales approach.
Profit center helps to derive the EC-PCA.  Profit Centers can be set-up to identify product lines, divisions, geographical regions, offices, production sites or by functions.
The difference between a Cost Center and a Profit Center is that the Cost Center represents individual costs incurred during a given period and Profit Centers contain the balances of costs and revenues.

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