Everything you need to know about revenue centers [explained by a Certified Accountant]

Explanation: What is a Revenue Center?

Revenue Center: Definition

Revenue center is a distinct operating unit of a business that is responsible for direct interaction with customers to sell products and services–such as a sales department or retail outlet–performance of which is evaluated only on its ability to generate sales and revenue, not the costs incurred.

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.

Organizational Structure: Where do revenue centres fit into a business?

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.

Responsibilities: Why do revenue centres exist?

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:

  • 1. Decisions regarding the size and direction of marketing and sales activities based on the knowledge of the market.
  • 2. Setting and negotiating sales prices, payment terms and delivery schedules.

Costs Control: How are expenses managed in revenue centres?

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.

Performance Measurement: How are revenue centres evaluated?

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.

3 Examples: What Are Examples of Profit Centers?

Here are three examples of revenue centers:

Example #1: Manufacturing company 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:

  • Sales, marketing and advertising department
  • Sales office
  • Wholesale outlet
  • Retail shop
  • eCommerce department or online store

Example #2: Department store revenue centers

In a shopping mall, each department may be considered as a separate revenue center, for example:

  • Women’s clothes
  • Men’s clothes
  • Children’s clothes
  • Women’s shoes
  • Men’s shoes
  • Children’s shoes
  • Sports clothes and equipment
  • Cosmetics
  • Jewelry and accessories
  • Cafe
  • Grocery store
  • Pharmacy

Example #3: Hotel revenue centers

Hotels usually measure the profitability of each of their revenue-generating units, including:

  • Accommodation - rooms
  • Restaurants
  • Bars and lounges
  • Cafes
  • Room service
  • Meeting and banqueting facilities
  • Health club – gym and spa facilities
  • Parking and valet service
  • Laundry
  • Telephone and internet
  • Gift shops
  • Reservation center

What is the difference between a hotel revenue center, cost center and profit center?

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:

  • Cost Centre: When expenses are used as the only performance indicator, the centre is classified as a cost centre.
  • Profit Centre: When both the expenses and revenues of a centre are used as a basis for its performance evaluation, it would be labeled as a profit centre.
Difference: Revenue Center vs. Profit Center vs. Cost Center
Center Performance Measure
Costs Revenues
Cost Center Yes No
Revenue Center No Yes
Profit Center Yes Yes

Difference: Revenue Center vs. Profit Center

The difference between revenue center and profit center is that profit center management is responsible for both production costs and sales revenue, whereas the performance of a revenue center is evaluated solely based on sales–not the costs incurred.

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
Center Performance Measure
Input: Costs Output: Revenues
Revenue Center No
Profit Center

Difference: Revenue Center vs. Cost Center

The difference between revenue center and cost center is that the business performance of a revenue center is measured based on output in the form of sales revenue, whereas cost centers are responsible for input costs of producing products or providing services.

Revenue centers and cost centers are the opposite of each other when measuring the performance of different business units because:

  • Revenue centers contribute to business output and profit because their performance is evaluated on the revenue they generate through sales and marketing activities.
  • Cost centers, or expense centers, increase input and reduce profit because they have authority over–and are judged on–the expenses they incur while producing goods and services.
Difference: Revenue Center vs. Cost Center
Center Performance Measure
Input: Costs Output: Revenues
Revenue Center No
Cost Center No

Sign up for our Newsletter

Get more articles just like this straight into your mailbox.

Related Posts

Recent Posts