Question

How is performance evaluated for a cost center?

1) Actual costs incurred compared to budgeted costs.
2) Actual segment margin compared to budgeted segment margin.
3) Comparison of actual and budgeted return on investment (ROI) based on segment margin and assets controlled by the segment.
4) None of these.

Answer 1

The performance of a cost center is evaluated by comparing actual costs incurred to the budgeted costs, focusing on cost management and adherence to the department's budget.

Step-by-step explanation:

The performance of a cost center is evaluated by comparing actual costs incurred to the budgeted costs. This involves monitoring whether the cost center has stayed within budget or if there have been variances that need to be addressed. While other metrics such as segment margin and return on investment (ROI) are essential for evaluating profit centers or investment centers, for a cost center, the focus is strictly on cost management. Cost centers are not directly responsible for revenue generation, hence segment margin or ROI are not the correct parameters for performance evaluation. Instead, the emphasis is on how well the cost center managers control costs and adhere to the budget allocated to their department.