Question

2. What is a cost center and how is its performance evaluated?

Answer 1

COST CENTER AND PERFORMANCE EVALUATED :-

1:- It means each and every part of the business organisation for which the cost is to be ascertained for the purpose of recovery from the customer.

2:- Each production and service department of the business organisation can be regarded as a seperate cost center . For example , in case of a textile mill, various production department are weaving department , spining department , drying department etc . example of service department are - accounts department , reception ,security , marketing etc.

3:- production department are basically income earning department , whereas service department give assistance to production department.

4:- The establishment of cost centres is very importance for " cost control". This is so because estimated cost is decided in advance for each and every cost centre. At the end of the period it is advised to compare actual cost with standard cost.thereafter the management has to take future corrective action.

5:- The difference between the actual costs and the standard costs, called the “variance“, is calculated for individual cost centers. “Variance analysis“ is a key tool for measuring performance of a “cost center“.