Cost of Revenue

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What is the 'Cost of Revenue'

The cost of revenue is the total cost of manufacturing and delivering a product or service. Cost of revenue information is found in a company's income statement, and is designed to represent the direct costs associated with the goods and services the company provides. Cost of revenue is different from cost of goods sold (COGS) because it includes costs outside of production, such as distribution and marketing.

BREAKING DOWN 'Cost of Revenue'

The service industry often favors using the cost of revenue metric because it is a more comprehensive account of the various costs associated with selling the final good.

The cost of revenue takes into account the COGS or cost of services sold and the total cost incurred to generate a sale. Although the cost of revenue takes into account many costs associated with sales, it does not take into account indirect costs, such as salaries paid to managers. The costs considered part of the cost of revenue include a multitude of items, such as the cost of labor, commission, materials, sales discounts and overhead allocated to a product.

When calculating the profit margins listed in an income statement, the cost of revenue margin yields the lowest value. This is because it includes the COGS or cost of services, and the direct costs. The contribution margin includes total variable costs, and the gross margin only includes the COGS or the cost of services. A company with a low cost of revenue to total revenue percentage indicates that it is in stable financial health and may have strong sales.

Cost of Revenue Example

Assume XYZ Inc. sells electronics products and offers services to repair electronic equipment. XYZ Inc. reported total revenue of $100 million, COGS of $15 million, and cost of services sold of $7 million. The company had direct labor costs of $5 million, marketing expenses of $1 million, and direct overhead costs of $3 million. Additionally, the company paid $10 million to its management and had rental costs of $8 million.

Therefore, the company had cost of revenue of $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 not included in the cost of revenue. Since the company had total revenue of $100 million, XYZ Inc. has a cost of revenue margin of $69 million. Moreover, the company has a cost of revenue to total revenue percentage of 31%, or $31 million divided by $100 million.