Everything you need to know about revenue centers [explained by a Certified Accountant]
Revenue center is one of the responsibility centers–along with a cost center, profit center and investment center–in cost accounting used to measure and control the performance of different units within a business (e.g., department, division) in terms of sales revenues and the associated costs.
Companies break down their business operations into separate revenue centers in order to monitor and manage the profitability of different products, services and markets–such as customer groups, geographic regions, industry or market segments.
Therefore, a revenue center can be any part of an organization that is delegated with the responsibility of directly interacting with customers in order to sell services and finished goods made by other business units, like a sales department or a market unit.
As the main goal of a revenue center is to generate revenues for a company and maximize its market share by selling products or services produced by other internal units, it is typically able to significantly influence the level of income earned by having the authority over:
While revenue centers may be responsible for their own departmental expenses, such as rent and salaries, they do not have direct control over the cost of production of products and services.
Therefore, revenue centers are not judged on the amount of costs incurred and revenue is their only performance indicator.
The performance of a revenue center is measured based on its output, where the objective is to meet or exceed the budgeted sales revenue and profit margin targets.
Here are three examples of revenue centers:
In a manufacturing company, the revenue centers may be the market or a sales units that are tasked with selling the finished goods produced by the company’s manufacturing divisions, such as:
In a shopping mall, each department may be considered as a separate revenue center, for example:
Hotels usually measure the profitability of each of their revenue-generating units, including:
Hotel business segments (e.g., hotel rooms, restaurants, laundry, parking and spa services) are profit centres if their performance is evaluated based on both expenses and revenues, as opposed to costs only (i.e., cost centre or expense center) or revenues only (i.e., revenue centre).
Similarly, all of the examples mentioned above are classified as revenue centres if a company uses sales revenue as the only performance measurement metric for these business units. Otherwise, they would be categorized as a cost centre or a profit centre instead:
|Difference: Revenue Center vs. Profit Center vs. Cost Center|
The main drawback of using revenue centers to measure performance is that managers who are judged only based on output have little motivation to control the costs and risks associated with generating sales.
Hence, a manager of a revenue center could be using unnecessarily expensive and risky ways to increase sales, which could decrease profit margins and increase the likelihood of bad debts.
Furthermore, it could be argued that pure revenue centers do not actually exist because no part of an organization operates without expending some business resources.
Therefore, revenue centers are useful when a company is entering a new market and expects that it will take a lot of time and startup expenses before the center becomes profitable.
In most other cases, a profit center is usually a better alternative that evaluates performance based on revenues as well as the cost of their acquisition, which reflects the value of a business unit more accurately.
|Difference: Revenue Center vs. Profit Center|
|Input: Costs||Output: Revenues|
Revenue centers and cost centers are the opposite of each other when measuring the performance of different business units because:
|Difference: Revenue Center vs. Cost Center|
|Input: Costs||Output: Revenues|
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