Cost of Revenue

What Is Cost of Revenue?

The term cost of revenue alludes to the total cost of manufacturing and conveying a product or service to consumers. Cost of revenue data is found in a company's income statement. It is intended to address the direct costs associated with the goods and services the company gives. The service industry frequently leans toward utilizing the cost of revenue metric since it is a more extensive account of the different costs associated with selling a decent or service.

Cost of Revenue versus Cost of Goods Sold

Cost of revenue is unique in relation to cost of goods sold (COGS) on the grounds that the former likewise incorporates costs outside of production, like distribution and marketing. The cost of revenue considers the cost of goods sold (COGS) or cost of services gave plus any extra costs incurred to produce a sale.

Albeit the cost of revenue factors in many costs associated with sales, it doesn't consider the indirect costs, for example, salaries paid to managers. The costs thought about part of the cost of revenue incorporate a large number of things, for example, the cost of labor, commission, materials, and sales discounts.

While looking at profit measures involving a standard formula revenue driven margins like those listed in an income statement, making a profit margin measure in view of the cost of revenue would produce a lower value than those normally involved by corporations for quarterly reporting. That is on the grounds that it incorporates the COGS or cost of services and other direct costs.

The contribution margin incorporates total variable costs, and the gross margin just incorporates the COGS or the cost of services. A company with a low cost of revenue to total revenue percentage shows that it is in stable financial wellbeing and may have strong sales.

Cost of Revenue Example

Here is a speculative illustration of how the concept of cost of revenue works. We should accept XYZ Inc. offers electronics products and offers services to repair electronic equipment. The company reports total revenue of $100 million, COGS of $15 million, and cost of services sold of $7 million. The company has direct labor costs of $5 million, marketing expenses of $1 million, and direct overhead costs of $3 million. XYZ likewise pays $10 million to its management and records rental costs of $8 million.

We can determine from this data that the company's cost of revenue is $31 million for the fiscal period. The $10 million paid to its management and the rental costs of $8 million are indirect costs, which are excluded from the cost of revenue. Since the company had total revenue of $100 million, XYZ Inc. has a cost of revenue margin of $100 million ($31 million = $69 million.) Moreover, the company has a cost of revenue to total revenue percentage of 31%, or $31 million isolated by $100 million.

Features

• This measurement is inclined toward by the service industry since it is a more complete account of the costs associated with selling a decent or service.
• Cost of revenue is not the same as cost of goods sold in light of the fact that the former likewise incorporates outer production, like distribution and marketing.
• The data for cost of revenue is found in a company's income statement.
• Cost of revenue is the total cost of manufacturing and conveying a product or service to consumers.