Creating and Managing Cost Centers

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:

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.

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.