Mastering Cost Center, Profit Center & Segment Structures in SAP S/4HANA Cloud, Public Edition

[emilymcox13]

Intro

Structuring Cost Centers, Profit Centers & Segments is a critical element of proper financial reporting in SAP S/4HANA Cloud, Public Edition as it is important to note that once Segments have been defined and confirmed as part of the organizational structure, they can’t be deleted but new ones can be added. However, other elements of master data, such as the cost center and profit center will stay open for modification. In addition, by default, the system does not check whether the profit center is mandatory, which can result in missing data in financial reports. SAP’s recommended approach tells us that we should define this structure during the Explore (Fit-To-Standard) phase of an implementation and configure it in the system at the beginning of Realize (Configuration) phase. Let’s look at some of the key critical elements that make up this master structure in the system and the recommended approach for set up.

Definitions

Profit Center – Is used for internal control and divides an enterprise into areas of responsibility for profits. An example could be a product, function, product group or location.

Cost Center – Represents a department of the company and allows comparison of plan vs. actuals in reporting. An example could be Accounting, Marketing, Manufacturing.

Segment – Used to organize financial data for reporting. Could be defined by a business unit or line of business in an organization. An example could be a product line or geographical location.

Profit Center Group – Can be used to group profit centers based on company specific reporting. An example of a profit center group could be Reporting, Allocation or Planning.

Cost Center Group – Can be used to group cost centers based on company specific reporting. An example of a cost center group could be Services, Admin & Finance or Marketing.

Functional Area – Are used to break down corporate expenditures and is commonly used in Cost of Sales Accounting. An example of a functional area could be production, administration, sales and distribution, marketing or research and development.

Document Splitting – Used to prepare balance sheets with multiple dimensions. Document Splitting can be defined as reporting by segment or profit center. If reporting the balance sheet by profit center, it will require an expert configuration request.

Overview of the Structures

The structure should be defined as one segment having many profit centers and one profit center having many cost centers, resulting in a 1:N relationship between these elements. The cost center group will represent a collection of cost centers for reporting and similarly, the profit center group will represent a collection of profit centers. Below will show a mapping sample spreadsheet with a flow chart and is not meant for productive use but is only to be used for conceptual purposes.  

(Figure 1: Mapping Diagram for Cost Center, Profit Center, Segment)

Cost Center Group	Profit Center Group	Cost Center	Profit Center	Segment	Functional Area
Staff Costs	Product Sales	Staff Salaries	Sales Division	Product	Human Resources
Sales and Marketing		Sales Commissions			Marketing
Training Expenses		Marketing Expenses			Marketing
	Product Upgrades	Development Costs	Upgrades Unit		Research & Development
		Testing Expenses			Consulting/Services
		Support and Training			Consulting/Services
	Product Licensing Revenue	Licensing Royalties	Licensing Center		Other Expenses
		Legal Fees			Other Expenses
		License Compliance			Other Expenses
	Consulting Revenue	Consultant Salaries	Consulting Services	Services & Consulting	Human Resources
		Travel Expenses			Other Expenses
		Training and Development			Consulting/Services
	Managed Service Revenue	Service Delivery Costs	Managed Services		Consulting/Services
		Infrastructure			Administration
		Customer Support			Consulting/Services
		Trainer Salaries	Training Division		Human Resources
		Training Materials			Consulting/Services
		Facilities Rental			Administration
		Project Staff Salaries	Project Labor	Labor Cost	Human Resources
		Supplies			Other Expenses
		Travel			Other Expenses
		Wages	Hourly Labor		Human Resources
		Overtime Costs			Human Resources
		Training Expenses			Other Expenses
		Contractor Fees	Contract Labor		Other Expenses
		Contractor Management			Administration
		Legal Costs			Other Expenses

(Table 1: Mapping Diagram for Cost Center, Profit Center, Segment)

In-System Set-Up

To set this up in the system, we start by defining our segments. In CBC, navigate to Accounting > General Ledger > Areas of Responsibility > Segments in General Ledger > Define Segment or search ‘Segment’ in the search bar on the top of the screen.

(Figure 2: Segment Path in CBC)

Once you are in the Segment configuration, add new Segments that will be used in reporting. This step should be completed prior to confirming the organizational structure. Once the organizational structure has been confirmed, you will not be able to delete pre-existing Segments, only add new ones.

(Figure 3: Configuration Screen for Segment)

We will then review additional relevant functional areas (from the sample data above). In CBC, navigate to Accounting > General Ledger > Reporting and Analytics for General Ledger > General Ledger Standard Reporting and Analytical Apps > Define Functional Area.

(Figure 4: Functional Area in CBC)

In this example, we will be adding the Functional Area, ‘Human Resources’, as this was not previously provided in the starter system. The functional area is only relevant to cost of sales accounting but comes standard with process J58 – Accounting and Financial Close, which will be available in the system regardless of the selected bundle – Enterprise or Baseline.

(Figure 5: Configuration Screen for Functional Area) 

Afterwards, we create the profit center master data using the Fiori App ‘Manage Profit Centers’ and assign the previously defined segment:

(Figure 6: Profit Center Master Data Creation)

(Figure 7: Profit Center Master Data Creation with Segment Assignment)

Next, we move on to create the cost center that will be linked to the previously created profit center, as shown below – using the ‘Manage Cost Centers’ Fiori App:

(Figure 8: Cost Center Master Data Creation)

(Figure 9: Cost Center Master Data Creation with Profit Center & Functional Area Assignment)

Next, we can set up both the cost center and profit center groups, as shown below:

(Figure 10: Cost Center Group Creation with Cost Center Assignment)

(Figure 11: Profit Center Group Creation with Profit Center Assignment)

Profit Center Reorganization

In some instances, an organizational restructuring may occur as business models change and adapt to internal or external factors for growth reasons. For this, Scope item 4PG – Organizational Flexibility in Financial Accounting is available as an optional scope item for the professional services industry and product-related businesses such as purchasing, sales and production. What this scope item allows is to divide, combine and replace profit centers, by changing the profit center assignment and posting balances to the new organizational entity. To utilize this, we would use the ‘Manage Organizational Changes’ Fiori App. This application would allow us to define the overall planning and execution of the reorganization, the date on which reorganization will occur, and provides reporting capabilities to view impacted financials and objects influenced by the reorganization.

Important Restrictions for S/4HANA Cloud, Public Edition:

• Cost Centers have been excluded from the scope
• Profit Centers in Real Estate Contracts, Networks, Network Activities and Activity Elements are not supported
• The following order types are supported:
  • 05 – Product Cost Collector (Dependent on Product)
  • 10 – Production Orders (Dependent on Product)
  • 30 – Maintenance Orders
  • 40 – Process Orders (Dependent on Product)

Reporting

Once all our entries have been defined, we can report this out in the balance sheet and income statement (P&L). Below is a simple journal entry posting report on the balance sheet along with the P&L filtered by the profit center we created earlier (Sales Division):

(Figure 12: Balance Sheet Report)

(Figure 13: P&L Income Statement)

In addition, the multi-dimensional balance sheet/income statement report can be leveraged to allow reporting on a balance sheet broken down by segment where the profit center has been added, as shown below:

(Figure 14: Multi-Dimensional Balance Sheet Report)

Conclusion

In conclusion, clearly defining the structure for the cost center, profit center and segment is important to enable accurate financial and legal reporting. Not having the structure defined correctly can cause reporting inefficiencies following go-live. By correctly setting up these entities, organizations can streamline their reporting processes and support financial decision making.