Creating and Managing Cost Centers (2024)

A cost center is an organizational unit that represents the location where costs are incurred. Typical cost centers include, for example, a company's accounting department, the information technology (IT) department, and marketing.

What you might be familiar with as the department of a company may be split into multiple cost centers in the system according to the operational and reporting requirements. Manufacturing entities such as the Bike Company typically have a cost center for quality control. There might be a single quality control department with multiple quality control cost centers in the system for each manufacturing plant. However, each cost center is assigned a single person responsible, typically the cost center manager.

Cost centers allow you to control costs and improve product and service valuations:

• You can analyze where costs are incurred within the organization.
• You can track the efficiency of the cost centers by comparing actual with planned costs.
• You can use different methods to assign activities and costs to the products, services, and market segments of your company.

A distinction is generally made between two basic types of cost centers:

• Operational cost centers, which provide services directly related to production, service, and maintenance processes. Costs posted to these throughout a financial period are allocated directly to products and services through cost rates.

• Support cost centers, which provide services indirectly linked to the core operation of the company. Costs posted to these throughout a financial period are allocated to operational cost centers or projects.

In the figure below, you can see the master data maintenance screen in SAP S/4HANA. An explanation is provided for a few of the fields that aren't self-explanatory.

1. Valid From: - Valid To: Cost centers are considered permanent master data; however, they can change over time as your company changes. For example, the manager of a cost center will change at the beginning of next year. For this, you would change the Person Responsible field. To keep the history of the person responsible up to the end of the year, you create a new validity period for the cost center starting next year. For some fields creating a new validity period is optional, for other time-based fields you must create a new validity period.
2. The Functional Area breaks down corporate expenditure into different functions, in line with the requirements of cost of sales accounting:
   • Production
   • Administration
   • Sales and distribution
   • Marketing
   • Research and development
3. The Cost Center Category is a mandatory indicator in the cost center master data, which groups cost centers with the following common settings:
   • The functional area assigned.
   • Lock indicators for if you are allowed to post:
     • Quantity values
     • Primary costs
     • Secondary costs
     • Revenue
     • Commitments
   • The activity types allowed.

The cost center standard hierarchy is a structure to which all cost centers within the controlling area are assigned.

The structure can be set up according to your needs, by areas of responsibility, functional requirements, allocation criteria, geographic, locations, and so on.

The hierarchy is intended to reflect the controlling and decision-making structures in your company.

Each level or node of the standard hierarchy is a cost center group under which the corresponding cost centers are grouped. The cost centers are assigned on the bottom node of a branch.

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