The performance evaluation of a cost center is typically based on its:

• A. ability to control costs
• B. return on investment
• C. amount of profit earned
• D. total net sales generated

Answer: (A)

Verified step by step guidance

1. Understand the concept of a cost center: A cost center is a department or unit within an organization that does not directly generate revenue but incurs costs while supporting the organization's operations. Examples include HR, IT, and maintenance departments.
2. Recognize the primary focus of a cost center: Since cost centers do not generate revenue, their performance is evaluated based on their ability to control and minimize costs while maintaining efficiency and effectiveness in their operations.
3. Eliminate irrelevant options: 'Return on investment,' 'amount of profit earned,' and 'total net sales generated' are metrics typically used for profit centers or investment centers, not cost centers. These metrics are tied to revenue generation and profitability, which are not applicable to cost centers.
4. Focus on the correct metric: The ability to control costs is the most relevant performance evaluation criterion for a cost center. This involves assessing how well the cost center manages its budget and reduces unnecessary expenses while maintaining operational quality.
5. Conclude the reasoning: Based on the above analysis, the correct answer is 'ability to control costs,' as it aligns with the fundamental purpose and evaluation criteria of a cost center.