Federal Nursing Home Administrator Practice Exam

What is the definition of a cost center?

1. An organizational unit that generates revenue

2. An organizational unit where costs are separately accumulated

3. A segment responsible for profit generation

4. An area that focuses on sales strategies

The correct answer is: An organizational unit where costs are separately accumulated

A cost center is defined as an organizational unit where costs are separately accumulated. This means that within an organization, a cost center is specifically set up to track and manage the expenses associated with its operations, allowing for better budgeting and financial analysis. Cost centers do not generate revenue directly; instead, they incur costs while contributing to the overall functional objectives of the organization. This is crucial for the management of resources and for identifying areas where improvements can be made to reduce expenses. The other options highlight different functions within an organization. For example, units that generate revenue or focus on profit generation are known as revenue centers or profit centers, which are distinct from cost centers because their primary function relates to income generation rather than managing and controlling costs. Similarly, units that focus on sales strategies would be more aligned with marketing or sales functions, which do not fit the specific definition of a cost center.