Cost center and Profit center are organizational units within the enterprise structure which are used for management reporting i.e Internal control.
What is Cost center?
As the name suggests Cost Center is the lowest level of the organizational unit representing a defined location of cost incurrence or otherwise to which you can meaningfully assign the cost (both direct & Indirect).
Any business can be classified in three way:
Cost center hierarchy looks like the below
If we need to analyze company expanse per division wise we need to apply the concept of the Cost center on division level. There would be two types of cost.
Direct Cost: Production of a material in which the incurred cost can be directly charge to it.
Indirect Cost: Finance Dept. Cost & HR etc… which will need its costs to be distributed to the direct cost later through CO module to determine the product cost (Direct & Indirect cost & Overhead)