Difference between Cost Element, Cost Center & Profit Center

Cost Element

A component of Controlling (CO) that collects and summarizes postings that arise within controlling in a reconciliation ledger. Cross-company and across business area postings are passed on to Financial Accounting. You can also create cost analyses in the CO applications.

Cost Element Group

Cost element group is nothing but a group of cost elements which help one to track and control cost more effectively. You can make as many number of cost element groups as you feel necessary by combining various logical cost elements.

In a similar line, the cost center group is also a group of cost centers which help one to track and control the cost of a department more effectively. You can make as many numbers of cost centers as you feel necessary by combining various logical cost centers In fact you can use various combinations of cost center group with the cost element group to track and control your costs per department or across departments

Cost Center

By assigning cost centers to organizational objects, you determine where costs incurred by the object are to be charged. The inheritance principle applies: If an organizational object is not assigned a cost center, the cost center assigned to the superior object applies.

An organizational object may also be assigned more than one cost center

Profit Center

Distributed Profit Center Accounting enables you to manage your profit center data centrally even when different business transactions are processed in different R/3 systems.

Example: In a given company, sales and production run on two separate systems

Elements of Cost

Raw materials are converted into finished products by a manufacturing concern with the help of labor, plants etc. The elements that constitute the cost of manufacturing are known as elements of cost. The elements of cost include the following:

• Material
• Labor
• Expenses

Each of these elements is again subdivided into direct and indirect material.

Direct material, direct labor, and direct expenses are those which can be traced in relationship with a particular process, job, operation or product. Indirect material, indirect labor, and indirect expenses are those which are of general nature and cannot be traced in relationship with a particular process, operation, job or product.

In this guide on Elements of Cost and Preparation of Cost Sheet (PDF), you will understand the elements of Cost, Classify overheads on a different basis and prepare a cost sheet.

Allocation Cost Element

The allocation cost element is a secondary cost element, under which the activity type or business process is allocated. The allocation cost element is the central characteristic used in all CO postings. It is therefore also an important criterion for reporting – for example, many reports are structured according to the posted cost elements. The allocation cost element must have been created in the cost element master data as a secondary cost element of the category  “Allocate activities/processes”.

What is the Primary Cost element and Secondary Cost Element

Every Profit and Loss GL account that needs to be controlled has to be defined as a cost element in SAP. Just as in FI General Ledger Accounts exist, in Controlling we have Cost Element. Each FI General Ledger Account that is a Profit and Loss Account is also created as a Cost element in SAP.

Primary Cost Elements are those which are created from FI General Ledger Accounts and impact the financial accounts eg. Traveling expenses, consumption account, in fact, any Profit and Loss GL account.

Secondary Cost Elements are those which are created only in controlling and does not affect the financials of the company. It is used for internal reporting only. The postings to these accounts do not affect the Profit or Loss of the company.

The following categories exist for secondary cost elements:

1. Internal Settlement: Cost elements of this category is used to settle order costs to objects in controlling such as cost centers, pa segments, etc.
2. Order/Results Analysis: Used to calculate WIP on the order/project
3. Overhead: Used to calculate indirect costs from cost centers to orders
4. Assessment: Used to calculate costs during the assessment
5. Internal Activity Allocation: Used to allocate costs during internal activity allocation such as Machine Labour etc

Creating Cost Element Group

From SAP Easy Access: Accounting -> Controlling -> Cost element accounting-> Master data -> Cost element group -> Create

• Enter a Cost Element Group title: CEG _ _ and click enter.
• Next enter your Cost Element Group name, type Cost Element Total for _ _ _ _ in the description box.

• Click the Lower level box.
• Enter CEG _ _ Prim as the title to create the primary cost element group. Type Total Primary Cost Elements as the description.
• Click the same level button, and type CEG _ _ Sec to create the secondary cost element group. Type a description identifying the secondary cost element.
• Click enter.
• Select CEG _ _ Prim, and click the cost element button. Enter interval range 700000-799999. Click enter.

• Select CEG _ _ Sec, and click the cost element button. Enter interval 800000-899999, and click enter, and then save.

Create Primary/Secondary Cost Elements

Create Primary Cost Elements

From the SAP Easy Access Menu: Accounting -> Controlling -> Cost Element Accounting -> Master Data -> Cost Element -> Individual processing-> Create primary

• Enter the account # 700000 Labor Expense into the Cost Element field, and click enter.
• If you have not created this G/L account previously, you will need to at this point. See the accounts and descriptions below for a list of accounts needed to create the primary cost elements.

• Enter 1 into the Cost Element category field
• Then click Save
• Repeat the above process for the following Cost Element (Account #) entering the appropriate Cost element category numbers for the appropriate Account #

Cost Element

(Account #)        Description                Cost element category
720000                Raw Material Expense         1
720100                Finished Goods Expense         1
720200                Trading Goods Expense         1
740000                Supplies         1
750000                Utilities Expense             1
751000                Production Order Settlement         22
780000                Rent Expense                 1
781000                Misc Expense                 1

Create Secondary Cost Elements

From the SAP Easy Access Menu: Accounting -> Controlling -> Cost Element Accounting -> Master Data -> Cost Element -> Individual processing-> Create secondary

From here you will be on the following screen. Enter the following Cost Element numbers with the corresponding Cost element category numbers clicking save after creating each Cost Element. Enter a validation date of 01/01/2003 to 12/31/9999.

Note: As mentioned in the introduction to this section, the secondary cost elements are used only for internal recordkeeping, and therefore should NOT have corresponding G/L accounts!

Cost element            Description            Cost element category
800000                         Labor                        43 (Internal Activity)
800100                         Assessed Costs         42 (Assessment)
800200                         Internal Order Settlement 21 (Internal Settlement)
800300                         Production Order Settlement 21 (Internal Settlement)