ACCA Performance Management (F5) Certification Practice Exam

What is the description of a cost center within an organization?

1. Division responsible for generating revenue

2. Division that incurs costs but has no revenue stream

3. Division that maximizes output

4. Division focused solely on customer service

The correct answer is: Division that incurs costs but has no revenue stream

A cost center is defined as a part of an organization that does not generate revenue directly but incurs costs in the process of producing goods or services. Its primary function is to manage expenses, ensuring that operations are efficient and effective while controlling expenditures within a specified budget. Managers of cost centers focus on monitoring and analyzing costs, seeking ways to improve productivity without increasing costs unnecessarily. This concept underscores the importance of cost management in an organization, highlighting that not all departments are responsible for generating profit; some are essential for supporting revenue-generating divisions. For example, a manufacturing unit might be considered a cost center if its main role is to produce products that are sold by another division. The other choices do not accurately reflect the characteristics of a cost center. A division responsible for generating revenue pertains more closely to a profit center, while maximizing output can apply to various divisions and not strictly to cost centers. Focusing solely on customer service may describe a support function, but does not encapsulate the concept of cost management intrinsic to a cost center.