Discretionary cost center

Definition

A discretionary cost center is a segment of a company where the manager has control over costs but not revenues or investment decisions. These centers often include administrative and support functions such as HR, R&D, and marketing departments.

5 Must Know Facts For Your Next Test

1. Discretionary cost centers focus on managing expenses rather than generating revenue.
2. Managers in these centers have flexibility in spending within a budget but do not directly influence profit margins.
3. Performance is typically evaluated based on adherence to budgets and qualitative factors rather than financial metrics.
4. Examples include departments like Human Resources, Research and Development, and Marketing.
5. These centers often deal with costs that are difficult to measure precisely in terms of direct output or profit.

Review Questions

• What distinguishes a discretionary cost center from other types of responsibility centers?
• How is performance typically evaluated in discretionary cost centers?
• Name three examples of departments that are commonly considered discretionary cost centers.

Related terms

Profit Center: A business unit where the manager is responsible for both revenue generation and cost control.

Investment Center: A division where the manager has control over both profits and the capital invested.

Cost Center: A segment where the manager controls costs but does not have responsibility for revenue or investment decisions.