CO – Profit Center Accounting 1

So Budget supplement. 

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So if I want to increase the budget, what I can do? Go to KO24 – Change. 

Now previously, we have already done for 2013, 1 lakh budget is given.

And now what I can do is, I can increase the budget. Say for example, 25,000 I want to increase. 

See, it became 1 lakh 25,000. So this is called budget increase. So we can increase the budget to the extent of whatever amount that we want, we can increase it. And see now budget return, KO26 – Change. 

Now see 1 lakh 25,000 is available. Out of 1 lakh 25,000, I want to return some budget. Say for example, 10,000, I want to return. Just take 10,000. That’s all. 

See, this became 1 lakh 15,000. So depending upon the situation, you can do it. We have budget return, budget change, and budget documents. See whatever the document that you want to see, the budget related documents can be seen here KO2A. 

See, 10,000, we have budget return. This is a budget return document. You can write even the theory part.

Also we have taken 25,000 budget.

This is budget supplement. So like this, we can increase the budgeting, etc. So this is budget about the internal order, etc. So with this, we have completed the cost center accounting. So in cost center accounting, we have seen so many topics and assessment and distribution and cost center wise reports, internal orders, so many other things we have seen. So these are the concepts which we have seen in cost accounting. Let us see profit center accounting.

Now let us see what is meant by profit centered accounting. Till now we have seen cost center accounting, in case of cost center accounting, we are capturing the costs. So different costs we have captured, so cost center wise reports we have seen, cost center wise, cost element wise, cost center planning also we have seen, we have seen group wise. So cost center planning and cost center wise reports, intel orders, budgeting, all those things we have seen. Now let us go through the profit center accounting. See, what is meant by profit center accounting? Profit center accounting is nothing but profit center wise profitability, we can arrive at. See, just like in cost center accounting, we are going to capture the cost by cost center wise. But in case of profit center accounting, we are going to define the profit centers. What are the profit centers? Profit centers are nothing, but whatever the management wants. See, maybe product wise, we can create profit centers or division wise or department wise, whatever it may be. In our case, in case of Dr Reddy labs, say, for example, we have Bulk Drug division, Pharma division, like that. In this bulk division, say for example, Pharma products, Pharma product 1, Pharma product 2. Say, for example, maybe different products we have. In the Bulk Drug division, say, we may be producing ibuprofen, paracetamol. Like, each product phase, I want to know the profitability, and the product wise profitability. So whatever the cost of manufacturing and whatever the total sales minus cost of manufacturing, if you are able to get these things by profit center wise, we can arrive at the profitability. Say, for example, we have Bulk Drug division, so management want to know the profitability by Bulk Drug division. See, in case of company code wise, we have all the company codes. Company code wise, profitability can be arrived at from financial accounting. Now in one company code, we have three divisions, Bulk Drug division, Pharma division, and x x x, some other division. 

Division wise probability, I want to arrive at. So in such case, so three divisions, we can call these things as SBUs, strategic business units. Under the strategic business units, actually, the lowest one is the profit center. How are you going to get the profitability for the bulk of division? Now Bulk Drug division, whatever the number of products that you have here in manufacturing, if you are able to get the profitability product wise, then you can get the total division wise profitability. So product wise profitability I want to arrive at. Now the lowest one is the profit center. In the case of cost center, I told you the lowest one is the cost center, even here also, the lowest one is the profit center. So if you arrive at the profitability by product wise and that is total division wise, then that is total production division wise. So for this production division wise, you can get the profitability. So like that, this is only a sample, so depending upon the real scenario, in what way you are going to arrive at the profitability that we need to define. So like this, we have to arrive at the profitability. Profit center plan we need to arrive first. Once you define this profit center wise profitability and this organization structure, we need to plan cost also. Now what is the cost of Bulk Drug division 1, Bulk Drug division 2? For this purpose, we need to create cost centers. The cost of each division for this purpose, we need to arrive at the cost center wise report. So just like, Bulk Drug division that we have done. So here I’m doing production division 9000 and here, Bulk Drug division 9001. So cost centers also, I’m going to create the same way. 

So these are all profit centers. Similar cost centers I’m going to create here, the reason is the cost of this production division is going to be captured in the cost center and revenues are going to be captured in the profit center. So now what I’m going to do, I’m going to link up cost center and profit center, so that the cost will be flowing to the profit center and I can arrive at the profitability. We’ll see how it is going to be done. So I’m creating production division. Until now, we have created only finance, P & A division, marketing division, then coat centers we have created. Now production division cost center also, we have planned for it. But till now we have not defined any cost centers for the production division. Now what my plan is, I’m going to create cost centers for production division. Again, in the production division there is a further bifurcation like Bulk Drug division and Pharma division. So in the Bulk Drug division, again, product 1, product 2. Whatever the expenses that I’m going to incur in order to manufacture this, alll those things will be posted to product 1 cost center. And all the expenses that are incurred in manufacturing product 2 is going to be posted to product 2 cost center. See, similarly here, what we have done the same way. 

Whatever the expenses that you have posted to corporate finance, corporate accounts, HR department, just like how we have posted expenses, similarly here, we are going to post expenses. And whatever the assessment and distribution that we have done, that is the common expenses we have distributed like electricity, water. All those things, we have allocated the expenses by way of distribution. So, the expenses which you allocate, the direct expenses, the primary cost if you are going to allocate to the cost center, that is called the distribution. If you are going to, allocate the expenses of the total of the departmental cost, and you are allocating by using the secondary cost element is called assessment. And these things are available even in the SAP library. So in every interview, there will be a question on assessment and distribution. What is meant by assessment? What is meant by distribution? And what are the main differences between both? In which circumstances are we going to use it? So by way of allocation of expenses, by way of assessment and distribution, how we have allocated the cost to other cost centers, in a similar way, you are going to allocate to production division also. Till now, we have not created any production cost centers. Say for example, canteen cost, we have allocated by using the assessment to all the departments. Similarly even production department is there, the cost of the canteen is going to be distributed even to these cost centers under production. Similarly, assessment, canteen cost and the distribution of electricity, water, everything, whatever the expenses, the primary cost you are going to distribute along with other departments, you are going to distribute even to the production department also. And apart from that, you are going to incur whatever the raw material cost, labor cost, any other cost that are directly incurred by this product will be posted to this cost center. The total cost are going to be captured in this cost center. Now when we are going to make the sale, when you are going to do the sale, you are going to post the sales to the profit center. Just like cost to cost centers, sales is nothing but revenues. You are going to post revenues to the profit centers, profit centers cannot take the cost directly. So then subsequently what we are going to do now? We have cost center and we have profit center, now both I want to link up. 

Similarly, I’m going to make a link between this cost center and this profit center. So that what happens, the total cost that you are going to incur will be posted in the cost center, total revenues will be posted in the profit center. And once the cost are posted here, the cost will be flowing from cost center to profit center once you are going to establish a link between these two. How we are going to establish a link that we’ll see in the cost center. Link is going to be given in the cost center only. Similarly, other cost centers and profit centers, the same way. Like that, I’m going to establish links between the cost center and profit center so that the cost will be flowing from cost center to profit center. And we are going to post directly revenues to the profit center. Now when you look at the profit centers, system will show you the revenues minus costs will give you the profitability for each and every profit center. So that is my plan. How we are going to do this we’ll see in the configuration. For that purpose, what I need to do, whatever the profit center I’m planning here, I need to create an organization structure. Similarly, for cost center also I want to create again. See all these cost centers we have created, now we are going to create the profit centers and both establish a link. Then see that the revenues are going to flow to the revenue centers that is profit centers. Costs are posted in the cost centers, in that way, it will be posted to these profit centers. So that is what we are going to do now. Now profitability is going to be shown by profit center wise, so that we’ll see now.

Controlling, Profit center accounting, Basic settings, Set Controlling Area. So here, controlling area, DRCA. Okay.

Next, Controlling Area Settings, Maintain Controlling Area Settings. Here, we need to create standard hierarchy. Just like the cost center hierarchy we have created, we have to create a profit center hierarchy. So DRLPCHIER, profit center hierarchy. Profit center local currency type, since we have selected already controlling area currency, let us take controlling area currency 20. Profit center local currency INR, I want to see my reports in INR. And from 2013 onwards I want to activate the indicator for profit center accounting. And the valuation view, legal valuation, always take legal valuation. Don’t take profit center valuation, we have to take only legal valuation because as for the legal valuation, we have to valuate the assets, liabilities, everything, that is, the assets and liabilities of  each and every profit center, valuation of the stocks, everything. So better you always take legal valuation.

And  dummy profit center is there, we’ll see this later because this is blank. Once we create a dummy profit center, it will come and sit here. And what is the purpose of the dummy profit center? So dummy profit center is nothing but, see, we are going to prepare profit and loss account as per the company’s act. And now you are going to arrive at the profitability by profit center wise. Whatever the total profits that you are going to create, whatever the total profit that you are going to arrive from the P&L account point of view, the profit which is arrived in P & L account and as per the company act should be equal to the profit that you are going to arrive by profit center wise. Whatever the total profitability that you are going to reflect by company code wise should be equal to the profitability that has been reflected in the controlling that is profit center wise. But 99.9%, the profitability as per the profit centers and profitability as per the companies act will never tally. Why? The reason being, say, whatever the number of profit centers that you are going to have, you are going to post only here, assets and liabilities are not going to be posted to profit centers. Only revenues and expenses, we are going to post it. Now, in certain cases, we may or may not be using profit centers in order to post few entries because it may or may not be required. And say, for example, a depreciation posted, I don’t take any profit profit center or few of the expenses, I may or may not be taking the profit center into account or the revenues into profit center, maybe the interest on financial charges. So on those things, once you are going to activate profit center accounting, system expect you to post everything to the profit center. Now when you are not going to post few entries to profit center, how your profitability as per the companies act and profitability as per the profit center accounting will tally? Because that element has already been taken care of in the profit and loss account and which you have not posted into profit center accounting. So in such case, what system will do, wherever you are not going to post any particular entries to profit centers, system by itself, it will be posting to dummy profit center. Then, when you are going to total it up, say for example, PC1 + PC2 + DPC = Profit by P/L A/C (profit center 1 plus profit center 2 plus dummy profit center is equal to profit by P and L account). Now, when you are going to post to profit center one, profit center two, that will be okay. If you don’t post to any of this profit center, the system by default it will take it to dummy profit center. So then, system will identify, then it will total up all these three and the profitability will be equal to as per the profit and loss account, profit by P&L account. For that purpose, dummy profit center has to be created. But, in case of new GL, the dummy profit center is not required. And, when you are looking at the conventional way of doing the profit center accounting, you require it. And anyhow, we’ll see that also. 

Let us see the, profit center accounting convention. 

So first of all, create dummy profit center. Unless you create dummy profit center center, we cannot go further. Even if you want to do something, the system will not allow you unless you create it. See here, Set Control Parameters for Actual Data. If you want to do something, the system says that your profit center’s accounting is not yet complete. Say for example, from 2013 onwards, I want to use profit center I want to transfer the line items, online transfer, that is whatever the entries that we have posted to financial accounting, I want it to transfer to the profit center accounting. If you try to do that, system says that controlling area is incomplete, “Controlling area DRCA is incomplete”. So that’s why you have to first create a dummy profit center, then only it will allow you. Go to Create Dummy Profit Center, EC-PCA Create Dummy Profit Center. So what I’m doing is ‘DRLDUMMY’. 

Click Basic data. Name, Dummy PC. Profit center group by default will take DRL profit center hierarchy.

Save it. Now you come and see maintain controlling area settings. See here this is filled up. 

Dummy PC, Dummy profit center for DRL. So now the system will allow you to do all other settings. Now go to Set Control Parameters for Actual Data. I want from 2013 onwards, line item wise, online transfer. 

Don’t ‘lock’ the system. If you lock, system will not allow you to post into the profit center accounting. So line items, I want it to online transfer, line items to be transferred to profit center accounting by online.

 

Next, under Plan Versions, go to Maintain Plan Versions. So plan version we have done in case of cost center accounting. Similarly, here also we are going to maintain plan version. Plan version is always zero. Zero means plan versus actual. So the comparison of plan versus actual is always zero. See here, this we have assigned to already to cost center accounting.

Now I’m going to assign plan versus actual to profit center accounting also. Select Settings for Profit Center Accounting, go to New entries. For 2013, I want to plan online transfer and line items to be transferred. Previous one, actual items we have checked. Now this is plan, plan items, whatever the plan items you want, I want that to be posted to profit center accounting. And in such case, what is the exchange rate? Previously, we have taken M, M means average rate. Now for controlling planning, we have to take P for cost planning. 

In financial accounting, generally, we take M, average rate. P is standard translation for cost planning, M is standard translation at average rate, that is for financial accounting. And all these things have to be done for the purpose of flowing of the plan data into profit center accounting. The previous one is flow of actual data into profit center accounting. With this, certain basic settings have been completed. 

Now I need to create a profit center hierarchy. To create profit center hierarchy, under Profit Center Accounting, go to Master Data, Profit Center Group, KCH1 – Create. First, I need to create profit center group. DRLPCHIER, that is profit center hierarchy. Click on hierarchy button. 

Message: The object already exists: Profit Center Group DRLPCHIER, Controlling Area DRCA. Change the object? Yes.

See Doctor Reddy Labs Controlling area, and dummy profit center already assigned here. Now below that what I want is I want Bulk Drug division, Pharma division. First of all, lower level I want production division. Click ‘lower level’. Production division, what is the number? 9,000. So 9,000, Production Division. Under this, I want to create lower level one and two, 90001 and 9002. 9001 is Bulk Drug division, 9002 is Pharma division. Under each again, I have to create two profit centers. Under Bulk Drug, there is 900101 900102. So here we have created the organization structure, now let me create profit centers. Under Master Data, Profit Center, Individual Processing, KE51 – Create. So 900101, Bulk Drug Product 1. 

Click Master Data. Here ‘assign period’ 01.04.2013. So Bulk Drug product 1. Person responsible, GM production. Profit center center group, so this profit center center will be coming under production division, under that Bulk Drug division, 9001. So bulk dot division product 1. Here these are the bulk dot division.

Here if you save, it’ll be saved in inactive mode. ‘Profit center 900101 saved in inactive status’. Now unless you activate it, it will not get created. So click the activate button at the top of the screen as shown in the image above, it will be created. So like this, it will be activated. If I want to create another one, 900102. 

Click Master Data. So this is Bulk Drug  product 2, under the same division.

But activate it. Now if you see here, in Profit Center Group, KCH1 – Change. 

We have Production division, in that there’s Bulk Drug division, in that profit center 1, profit center 2. Similarly for 9002, we’ll create profit centers. 900201, this is Pharma product 1.

I have one more thing I need to tell you here. Here, in this company codes tab, to which company codes are you assigning it, what are the company codes? 

If you have more than one, then you have to select it. Otherwise, only one company code. This is already linked to Dr Reddy Labs Bulk Drugs. So let us activate it. 

Similarly, 900202. Here, this is Pharma product 2. 

So if you have a clear idea about what you are doing, if you create the organization structure like this, then you’ll have more clarity. So we have done Bulk Drugs and Pharma. Under those, two profit centers we have created. Let us check this group. KCH1 – Change. See here.

Now once we have created this one, the same thing you need to create even the cost centers. Same organization structure you have to create in the production division of cost center. Because all the cost centers we have already created, but we have not yet created the production division cost centers. Now I’m going to create production division cost center hierarchy and establish a link between the cost center and the profit center. Let us see how we do it. So let’s go to Cost Center Accounting, Master data, Cost Center Group, KSH1 – Create, KSH2 – Change. So DRL standard hierarchy. Already we have made a provision for production division. Now under this, I need to create two lower levels for Bulk division and Pharma division. That is 9001 and 9002.

Under these again, I have to create cost centers. Under the Bulk Drug division, we need Bulk Drug product 1, Bulk Drug product 2. But same way, what we have created in the profit center, the same way I’m going to create now even as cost centers. So let us create cost center. So go to Cost Center, Individual Processing, KS01 – Create. This is 900101, from 01.04.2013 onwards. So Bulk Drug product 1. Cost center category, so we have cost center category F for production division. Hierarchy area, so hierarchy area will be 9001 because it’s Bulk Drug division. Business area, DRHY. Now what I told you, I’m going to establish a link between cost center and profit center. Now what is my profit center center here? 900101 and what is the cost center also? 900101 I have given. So similar dedicated cost centers I have created. Now this profit center center I’m going to link up here. Now here, system will show you.

So we have four profit centers. See 900101. Bulk Drug 1, Bulk Drug 2. I am assigning 900101. This is profit center but this is cost center we’re creating. Now we are establishing link from cost center to profit center. This is what we have done. Save it. 

Similarly, I want to take 900102. This is Bulk Drug product 2.  Everything same except name and profit center. For profit center, Bulk Drug product 2, 900102.

Save it. So Bulk Drug product 2 and the cost center product 2 are both linked now. 

So similarly, I need to create 900201. This is Pharma product 1. For hierarchy area, take 9002, Pharma division. Profit center, 900201.

Next I’m creating 900202. Same way, now Pharma product 2.

So here, first of all, if you understand this organization structure, then the same thing you are going to replicate in the SAP system. First, we need to plan to have this one. Now see, I’ll show you both.

Go to Profit Center Accounting, Master Data, Profit Center Group, KCH2. Also in . KSH2. 

See now. Here this is cost center accounting and profit center accounting. If you observe, production cost center, I just want to take production one. See 9000 production division, under that bulk division, Pharma division. Same on the other side, Bulk division, Pharma division.

Here in profit center, we have Bulk Drug division, product 1, product 2. Even in cost center, we have Bulk Drug division, product 1, product 2. Also both sides, Pharma division product 1, product 2. But all the first is profit center accounting, and the second is cost center accounting. So what I have done here in this cost center, in the Bulk Drug, this profit center is linked. So that what happened, the cost will be posted to the cost center and the cost will be flowing from this cost center to this profit center. The organization chart is the plan, and the same way, we have created both. So it may be a bit confusing for you to understand. But the thing is first, you try to understand this plan. 

We are creating dedicated cost centers for each profit center. If you ask me, is this the same way you follow for all companies? Means no, depending upon the nature of the company. Say for example, a company is having 2,000 products. Are you going to create profit centers by product wise? No. Never. If the number of products are less, then we can go with product wise. If number of products are more, then you have to create divisions. Say, we had a company where we have profit center accounting, more than 5,000 products are there for them. For that, we have created a division based profit centers. There, one is textile division, processed food division and, something like that, certain major divisions are there, division wise. Under the divisions, again, under the textile division, we have the cotton, complete exclusively cotton division they have separately. Other than cotton, some certain divisions are there, three, four divisions. So division means we have created profit center accounting. Similarly, food processing division. Under the food processing processing division, so they had the classification of different foods, so that is around half a dozen. So for each and everything, we have created a profit center. So all the total profits, all the sales, revenues will be posted to profit center accounting.

So anyhow, the planning of your profit center accounting has to be done as per the actual requirement of the company. So now we have created. Now what I want to do is, let me check for FS00. For 3 lakhs, what is the sales?

3 lakhs, 1, Sales Pharma products. So what I will do is I will change it to sales, Bulk Drug product 1. 

And one more thing, you need to change your field status group because we need to create revenue element for each and everything. Let us see here.

Let us take revenue account G029. The reason being, in G029, profit center accounts will be activated, that is profit center field will get activated. I’ll save it. Now I’m going to create cost element. Click ‘Edit Cost Element’ at the top of the screen. So cost element means revenue element. 

Here, we have already created Sales Bulk Drug product 1. Similarly do the same thing for sales- Bulk Drug product 2. 

Similarly, create with template for 300003, Pharma product 1, Sales. Also create the Fourth one for Pharma product 2, sales. And one more thing, we have created cost element for each and everything. Cost element category is Revenue element, 11.

For all sales, there’s a revenue element revenues. Similarly, edit cost element for all, and select revenue element, 11. So each and every sales account needs to be defined as revenue. And one more thing here I told you, G029 is the field status group. Here, profit center field will get activated. Double click the field status group, go to ‘Additional Account Assignments’. See here, profit center is optional. 

So at the time of posting the sales entry, what you can do is you can post the revenues to profit center. Just take cost center, I don’t know whether you remember or not, previously, we have created with G001, but after activating the controlling area, we have changed the G001 to G004 so that cost center fields will get activated so that you can post every expenditure to your cost center. Similarly, now every sales, whatever we post, that should be posted to your revenue center, that is profit center. So that’s why for that purpose, we have activated profit center field.