What does the term "cost center" refer to?

The term "cost center" refers to a unit or department within an organization that incurs costs but does not directly generate revenue. This definition aligns well with the role of cost centers in managerial accounting, which are established to track expenses and assess the efficiency of operations without focusing on income generation.

Typically, cost centers can include departments like human resources, accounting, and customer service, which provide essential support functions for the organization but do not produce revenue directly. The purpose of identifying cost centers is to manage and control costs, ensuring that resources are utilized efficiently.

In contrast, options that describe revenue-generating units or projects based on production variables do not accurately reflect the purpose of a cost center. Therefore, understanding the differentiation between cost centers and profit-generating departments is crucial for effective financial management and accountability within an organization.