Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).
Definition of Revenue Center
In a revenue center, outputs are measured in monetary terms, but no formal attempt is made to relate inputs (i.e. expenses or costs) to outputs. Revenue centers are, marketing organizations that do not have profit responsibility. Actual sales or orders booked are measured against budgets or quotas. Each revenue center is also an expense center in that the revenue center manager is held accountable for the expenses incurred directly within the unit. The primary measurement, however, is revenue. Revenue centers are not charged for the cost of the goods that they market. Consequently, they are not profit centers. Revenue centers do not typically have authority to set selling prices.
- In order to evaluate a revenue center’s performance, only its revenues must be considered and everything else must be ignored.
- Since the basis of their evaluation is sales, these centers have no reason to control costs.
- The marketing manager of a product line, or an individual sales representative are examples of revenue centers
Importance of Revenue Center
A revenue centre is the business operation responsible for generating a company’s sales revenue. These centres may be departments, divisions or business units that have direct interaction with consumers to sell goods and services. For example, a hotel might add a snack bar or a coffee counter to generate extra sales. Companies usually bifurcate their business operations into revenue centres, in order to determine the profitability of each good or service it produces. Size of the company, the number of product or service lines and industry standards are all factors that companies use while choosing or adding additional centres to facilitate smooth working of an organization. While retail and wholesale companies are traditional revenue centre businesses, service companies may also add additional centres to improve the profitability of current business operations. For example, hotels may add a small restaurant or snack bar for guests, petrol pumps may add convenience stores stocked with various food and assorted items, and gyms or health clubs may add small shops marketing trendy workout clothes or vitamin supplements. Each revenue unit addition adds a potential profit line to the company’s overall profit potential.
Companies may add revenue centres as a means to enter new markets or industries. Starting small is usually a better way to establish and grow business operations where firm can avoid any large amounts of debt or other expenses. With the passage of time these centres also become profitable and will recover the initial start-up expenses. Commencing multiple revenue units may inflame the potential downside to these new business operations.