Define Cost of Revenue

Cost of Revenue

What Is Revenue Cost?

The overall cost of creating and providing a product or service to customers is referred to as cost of revenue. The income statement of a corporation contains information on cost of revenue. Its purpose is to illustrate the direct expenses related with the company's goods and services. Because it offers a more thorough picture of the many expenses connected with selling an item or service, the service industry frequently prefers to utilise the cost of revenue statistic.

TAKEAWAYS IMPORTANT

• The overall cost of creating and providing a product or service to customers is known as the cost of revenue.

• A company's income statement contains information on cost of revenue.

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• The service industry prefers this statistic because it provides a more complete picture of the expenses associated with selling a product or service.

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• Because the former involves external production, such as distribution and marketing, the cost of revenue differs from the cost of products sold.

Revenue Cost vs. Cost of Goods Sold

The difference between cost of revenue and cost of goods sold (COGS) is that the former covers expenditures other than manufacturing, such as distribution and marketing. The cost of revenue includes the cost of goods sold (COGS) or the cost of services delivered, as well as any other expenditures paid in order to make a sale.

Although many costs related with sales are included in the cost of revenue, it does not include indirect expenditures such as management wages. The cost of labour, commission, materials, and sales discounts are all examples of charges that are included in the cost of revenue.

When comparing profit measures using a conventional formula for profit margins, such as those provided in an income statement, a profit margin measure based on the cost of revenue would produce a lower figure than those commonly used by businesses for quarterly reporting. This is because it comprises the cost of goods sold (COGS) as well as other direct expenditures.

The contribution margin accounts for all variable expenses, whereas the gross margin solely accounts for COGS (cost of goods sold). A low cost of revenue to total revenue % suggests that a company's financial health is steady and that it may have high sales.

Example of Revenue Costs

Here's an illustration of how the cost of revenue idea works in practise. Assume that XYZ Inc. sells electronics and provides electronic equipment repair services. The firm reported $100 million in total revenue, $15 million in cost of goods sold, and $7 million in cost of services supplied. The firm has $5 million in direct labour expenditures, $1 million in marketing costs, and $3 million in direct overhead costs. XYZ also pays its management $10 million and reports $8 million in rental fees.

We may deduce from this data that the company's cost of revenue for the fiscal year is $31 million. The $10 million paid to the company's management and the $8 million in rental charges are indirect expenditures not included in the cost of revenue. XYZ Inc. has a cost of revenue margin of $100 million ($31 million = $69 million), based on total revenue of $100 million. Furthermore, the corporation has a 31 percent cost of revenue to total revenue ratio, or $31 million divided by $100 million.