What Is Cost of Revenue?
Let me explain cost of revenue directly to you: it's the total cost your business incurs to manufacture and deliver a product or service to consumers. You'll find this information in a company's income statement, where it captures the direct costs linked to the goods and services provided. In the service industry, this metric is particularly useful because it gives a more complete view of all costs involved in selling something.
How Cost of Revenue Works
Cost of revenue covers everything from production to sales. It includes raw materials, labor, and overhead, plus other direct costs for getting the product to the customer. You need to track this because it shows how much revenue remains after covering these essentials, which then goes toward overhead or indirect costs not directly tied to production.
Formula and Calculation of Cost of Revenue
Here's the straightforward formula you can use: Cost of Revenue = COGS + Shipping Costs + Commissions + Warranties + Returns + Other Direct Costs. Start by choosing your period, like monthly or quarterly, for analysis. Factor in beginning inventory for COGS accuracy, and remember that 'other' costs can vary by your business and evolve over time.
What Is Included in Cost of Revenue
Direct materials cover raw inputs and any acquisition shipping. Direct labor includes wages for production workers, often allocated across products. Manufacturing overhead handles indirect production costs like utilities. Freight and shipping get products to buyers, while duties and taxes apply to distribution, especially internationally. Returns and warranties account for post-sale costs, and commissions go to sales agents. Other direct costs depend on your specific setup.
Cost of Revenue vs. COGS
Cost of revenue goes beyond COGS by adding distribution and marketing costs. It includes COGS plus extras needed to make a sale, but skips indirect items like manager salaries. Using it for profit margins gives a lower value than standard reports, as it encompasses more. A low cost of revenue to total revenue ratio signals strong financial health.
Cost of Revenue Example
Consider this example: If a company like XYZ Inc. has $100 million in revenue, $15 million in COGS, $7 million in service costs, $5 million in direct labor, $1 million in marketing, and $3 million in overhead, but $10 million in management pay and $8 million in rent, the cost of revenue is $31 million. That leaves a $69 million margin, or 31% of revenue.
Frequently Asked Questions
Cost of revenue differs from operating expenses by focusing on direct manufacturing ties, while operating expenses are broader indirect costs. Yes, it's an expense category for costs to generate product-specific income. It's crucial because it reveals all costs to earn revenue, aiding strategic capital use.
The Bottom Line
In summary, cost of revenue totals all costs to produce and sell a good, including COGS and beyond to delivery and marketing. Use this to grasp your true product profit margin.
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