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When evaluating the performance of a cost center, the appropriate measurement technique would be actual costs incurred compared to budgeted costs.

What is cost center?

Internal organizational services like accounting, human resources, or information technology, for instance, incur operating costs even though they don't directly contribute to profit. The main responsibility of a cost center is to keep track of actual spending so that it can be contrasted with the budget.

What is budget and actual cost?

  • A budgeted cost is a projected future expense that the organization anticipates racking up later on. To put it another way, it's an expected cost that management believes will be incurred in a future period based on anticipated sales and revenues.
  • Actual cost refers to the actual amount spent to purchase an asset, which includes the supplier-invoiced cost as well as the costs associated with delivery, setup, and testing the asset. When an asset is first shown as a fixed asset in the financial accounts, this is the cost associated with that item.

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