Internal orders are normally used to plan, collect, and settle the costs of internal jobs and tasks. The SAP system enables you to monitor your internal orders throughout their entire life-cycle; from initial creation, through the planning and posting of all the actual costs, to the final settlement and archiving.
An Internal Order is a self-contained mini project cost object, i.e. it's a collection of costs, but not a full project with WBS and network relationships. The Internal Order should settle to Fixed Asset, Project, Cost and/or Profit Centers at the accounting period (month) end. It's a process similar to overhead allocation. In turn, the Internal Order can also be settled into and serve as an interim placeholder for overhead costs.
SAP Help on Internal Orders
Internal Orders Overview
Internal order is an virtual place of collecting/pooling the costs of a particular activity/task. i.e. it is a method to collect those costs and business transactions related to the task/activity. It is a means of tracking costs of a specific job, service, or task . Periodically the costs which are pooled in an internal order can be settled to an asset or to a cost center or to a GL Account or to an order. Thus, while recording you need not anlyse the costs. Just record and pool the costs in internal order. After that (generally at the end of the month) these costs are analysed and settled to relevant elements (like asset or cost ceter etc).
This method of recording and settling the costs helps in analysing the costs cost center wise, profit center wise or cost element wise. This level of monitoring can be very detailed but allows management the ability to review Internal Order activity for better-decision making purposes.
Difference between Cost Center & Internal Order
Internal orders are an excellent means of managing costs. Internal orders have many controls such as Execution profile, status profile, budget profile, plan profile etc to manage the costs. http://www.sap-img.com/financial/difference-between-cost-centers-and-internal-orders.htm
Internal Orders are used for short term purpose like Trade Fairs, Job Fairs etc., where as Cost Centers are used for long term purpose to capture the day to day costs.
Finally you have to settle the Internal orders to any cost object, wherein Cost centers are used to distribute/assess the costs of the company they are not settled.