Building Blocks of SAP - What are Cost Centres, Profit Centres and General Ledgers?

Mel O'Sullivan - April 19, 2021

Unless you worked in a military Q store or in Project Management it's unlikely that your military service gave you much exposure to General Ledgers, Cost Centres and Profit Centres (mine didn't).

The only reason I knew anything at all about the subject when I first started using SAP was due to a basic Bookkeeping course I completed in transition. Yeah - A highly trained Army Logistics Officer did a Double Entry Bookkeeping course because she thought it might be of use to her getting a job! I really had no idea about planning transition. Strangely - that little three day course proved to be an invaluable building block to later understanding (not that I knew it at the time).

If you ask Google about General Ledgers and Cost/Profit Centres in SAP it's likely you'll get the usual brain frying deluge of answers that you need an Accountant to interpret. We can leave the highly detailed technicalities to the accountants.

Veterans have to learn to be cost and profit oriented when we move into business after transition. Who cares what ammunition costs when you need to be using it right? If you're anything like me your habit is to place more value on time than on money in business decisions - at least at first.

Civilian businesses exist to make a profit or they don't exist at all. In order to know if you are making a profit you first need to know where your costs are. General ledger and cost/profit centre accounting is mostly about visibility on where your business is spending money, wasting money and making money.

General Ledgers mostly track the "What?" Cost and Profit Centres track the "Where and the Who?" Cost and Profit Centres are subordinate to the General Ledgers in the SAP Organisation hierarchy. We'll let the Business Accountants worry about the technical details for now. General Ledgers might be called Strategic and Cost/Profit Centres might be called Tactical in their areas of impact. Let me try and explain.

Say you are running a small retail business with two separate locations(East & West). Each location is identical in terms of Buildings, Equipment, Stockholdings, Inventory and Labour force. Sounds a bit like the ideal military unit doesn't it? At some point you are going to want to see a comparison on the profitability of each location. We'll focus on cost tracking for the moment. You want to know what money is being spent on and where. A very basic list of General ledgers (What) for your business might be:

600001 Advertising

600002 Salaries & Wages

600003 Buildings

600004 Equipment - Repairs & Maintenance (R&M), New (Capital)Acquisition, Fleet turnover

600005 Rent

600006 Inventory

The above GL list tells you what money is being spent on but not where it is being spent or who is spending it. Maintaining separate ledgers for each location is inefficient for top down Data visibility so Cost Centres are used to isolate costs for each location. Think of the General Ledger as the Big Bucket of Gold and the cost/profit centres as the scoops that fill or empty it.

Each location has a forklift and a truck. Two sets of cost centres are necessary.

East Location

701463 - R&M Parts East

701464 - R&M Maintenance Labour East

West Location

801463 R&M Parts West

801464 R&M Maintenance Labour West

If you want to see your whole of business equipment costs/profit analysis you would conduct a Data Search on GL 600004. If you want to see how much parts are costing you, you would search on Cost Centres 701463 and 801463. If you want to see what your maintenance contractors are costing you a search on Cost Centres 701464 and 801464 would get the right result. If you suspected someone was stealing parts from you in the East location a detailed audit on all spend in cost centre 701463 might yield leads on your investigation.

Profit Centres work in a similar fashion tracking sales and income.

As a SAP operator you simply choose the appropriate number (with description) from a drop down list and fill in the mandatory field- either in purchasing, labour cost tracking or sales. Actual numbers and list tables are decided by The Business. If you're stepping into a SAP picture in a military context all of these number tables already exist independent of the software using them. They would simply be moved from one database to another.

Not all small businesses use General Ledger and Cost/Profit Centre accounting - but all of the multinationals pretty much have to (regardless of the software application they operate). Well worth the effort to at least get yourself a basic understanding of the concepts.

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