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Revenue center

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Title: Revenue center  
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Subject: Management accounting
Collection: Accounting Terminology, Management Accounting
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Revenue center


In division that gains revenue from product sales or service provided.[1] The manager in revenue centre is accountable for revenue only.

Contents

  • Overview 1
  • Problems with Revenue Centres 2
  • Examples of Revenue Centres 3
  • See also 4
  • References list 5

Overview

A revenue centre is one of the five divisions of a responsibility centre – Cost centre, Revenue centre, profit centre, contribution centre and investment centre.[2] Cost centres, like revenue centres, only monitor costs, thereby making them a counterpart to the revenue centre.[3] Revenue centres only measure the output (in fiscal standings) and are therefore marketing establishments which are exempt from profit generation and accountability thereof.[4] In a revenue centre performance is measured by comparing actual sales to projected ones (as well as number of sales or revenue per time scale). Quota and budget comparisons are also used as a performance indicator.[5][6]

A revenue centre has costs, however to the manager of a revenue centre this is of little importance as revenue is his sole performance indicator.[7] Not all costs are ignored in a revenue centre. For example the manager of a revenue centre is responsible for the expenses of his department (such as maintenance costs).[8] In a sales office (the most widespread example of a revenue centre), maintenance costs can be construed as rent, salaries, taxes and security. However, any costs related to product sale and manufacturing are not included in such expenses.[9] A revenue centre becomes a profit centre if the latter is encompassed, thus making a profit centre a blend of both a cost and revenue centre.[10]

In a revenue centre the manager usually has control over issues regarding marketing and sales. This is delegated to him because both of the spheres require extensive knowledge that is explicit to the local market. However, the revenue centre manager will not be given control over decision on quantity or product mix. If the manager is given control over these decisions problems can arise (see below).[4]

Technological advancements have been able to reduce expenses in revenue centres as well as bring non-traditional (online) revenue centres to non-retail companies that work in manufacturing or service industries. This can be done by setting up websites which offer products directly from the supplier. This reduces cost by shortening the distribution channel and cuts out wholesalers and retailers.[11]

Problems with Revenue Centres

One of the biggest problems in a revenue centre is that costs are mostly ignored. If costs are not monitored by another division of the business, profits can be hindered. Furthermore the manager of a revenue centre does not have the insight required for marketing decisions, consequently responsibility for a marketing decision cannot be given to a revenue centre manager. Setting prices on products or services is an example of revenue centre managers being unable to undertake marketing decisions.[4]

It is easy to calculate the performance of a revenue centre as revenue is the only variable being performed against. However, this means that performance evaluations are also limited to one variable which is usually not enough to see the performance of a business division.[12]

Pure revenue centres hardly exist. This is due to the fact that costs cannot be completely ignored. Usually (as stated above) revenue centre managers control expenses.[12]

Revenue centre managers should not be allowed to make marketing decisions. For example, if a revenue centre manager is allowed to set the revenue target, he will maximise revenue. This will cause the marginal revenue to become zero.[7]

In large companies with multiple products revenue centres will be responsible for meeting revenue target for each product. The problem will arise if all revenues are added together into a total of all products. The revenue manager will then be able to make up any losses in revenue by taking the revenue from the ones that outperformed the targets to the ones that underperformed, thereby causing a loss in overall profits.[7]

Businesses may decide to open revenue centres when entering new markets or industries. The initial cost of these centres is high and it is highly likely that a lot of time is required in order for those centres to become profitable and cover the start-up expenditures.[7]

Examples of Revenue Centres

The following is a list of some examples of revenue centres.

  • Sales office[7]
  • Amazon's eCommerce department[5]
  • Hertz's national car reservation centre[5]
  • In hotels:[13]
    • Rooms division
    • Restaurants
    • Bars
    • Lounges
    • Room service
    • Banqueting facilities
    • Telephone
    • Gift shops
    • Newsstand
    • Valet parking
    • Laundry
  • In hospitals:[14]
    • Blood bank
    • Cardiology
    • Emergency department
    • Inhalation therapy
    • Labour and delivery
    • Laboratory
    • Medical/surgical supplies
    • Operating room
    • Pharmacy
    • Physical therapy
    • Radiology

See also

References list

  1. ^ "revenue center". Businessdictionary.com. Retrieved 23 October 2011. 
  2. ^ P. Tulsian (1 July 2006). Cost Accounting. Tata McGraw-Hill Education. p. 1.15.  
  3. ^ Michael C. Jensen (1998). Foundations of Organizational Strategy. Harvard University Press. p. 351.  
  4. ^ a b c Pradip Kumar Sinha (2007). Case Study in Marketing. Nirali Prakashan. p. 31.  
  5. ^ a b c Belverd Needles; Susan Crosson (19 February 2013). Managerial Accounting. Cengage Learning. p. 250.  
  6. ^ Jawahar Lal (1 August 2002). Cost Accounting (3 ed.). Tata McGraw-Hill Education. p. 844.  
  7. ^ a b c d e James W. Bush; Daniel Johnston (1 January 1998). International Oil Company Financial Management in Nontechnical Language. PennWell Books. p. 85.  
  8. ^ V.R. Palanivelu (1 January 2007). Accounting for Management. Firewall Media. p. 406.  
  9. ^ N. GHOSH (1 January 2005). MANAGEMENT CONTROL SYSTEMS. PHI Learning Pvt. Ltd. p. 23.  
  10. ^ Mahesh Kulkarni; Suhas Mahajan (2008). Management Accounting. Nirali Prakashan. p. 6.8.  
  11. ^ "What is a Revenue Center". wiseGEEK. 2014. Retrieved 22 October 2014. 
  12. ^ a b Michael Kinney; Cecily Raiborn (31 May 2012). Cost Accounting: Foundations and Evolutions. Cengage Learning. p. 509.  
  13. ^ Abraham Pizam (2010). International Encyclopedia of Hospitality Management. Butterworth-Heinemann. p. 578.  
  14. ^ Steve A. Finkler; David Marc Ward (1999). Essentials of Cost Accounting for Health Care Organizations. Jones & Bartlett Learning. p. 413.  
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