The agreement covers the 2014 and '15 seasons.
Yost, 58, guided the Royals to an 86-76 record and the team was in the playoff picture until the final week of the season. No team won as many games as Kansas City did -- 42 -- after the All-Star break this year.
The record is the best for the Royals since 1989 when the team went 92-70.
Yost has been the Kansas City manager since 2010. While the Royals lost 95 games in his first season, they have improved in number of wins each year. Kansas City is 284-329 with Yost as manager.
Yost previously managed the Milwaukee Brewers almost six full seasons (2003-08) and has a 10-year managerial record of 741-831.