No Automatic Cost Centers
Jaap de Jonge, Editor, Netherlands
: cost centers are evaluated on the cost efficiency with which they use a mix of inputs (labor, materials, and outside services) to produce or generate the required outputs. So they are NOT judged on how much revenue they make or how much profit they generate.
Indeed a production facility or department typically has those characteristics, but it is still a management decision to treat it as such (in accounting terms).
For example if we have a firm with 3 factories, it could be a management decision to treat them as one cost center or as 3 cost centers.
So I believe the first part of the answer to the question how cost centers are created is that they are created by a management decision.
Who can give some further typical implementation steps for establishing a cost center?