Cost of revenue definition
/What is the Cost of Revenue?
The cost of revenue is the total cost incurred to obtain a sale and the cost of the goods or services sold. Thus, the cost of revenue is more than the traditional cost of goods sold concept, since it includes those specific selling and marketing activities associated with a sale.
What is Included in the Cost of Revenue?
The following costs are all considered part of the cost of revenue:
Cost of the materials related to a product sale
Cost of the production labor related to a product sale
The overhead allocated to a product that is sold
The cost of labor associated with a services sale
The cost of a sales call
The cost of a coupon or other sales discount or promotion associated with a sale
The commission related to a sale
What is Not Included in the Cost of Revenue?
The cost of revenue does not include costs that are more general or administrative in nature. Below are some common types of costs that are not included in the cost of revenue:
General and administrative expenses. Includes the salaries of office staff, executives, and other non-production personnel, as well as office supplies and administrative overhead.
Research and development. Includes the costs associated with creating or improving products or services.
Sales and marketing expenses. Includes advertising and promotion costs, as well as the salaries of the sales and marketing teams.
Financing costs. Includes interest payments on loans or lines of credit.
Non-operating costs. Includes expenses related to investments, lawsuits, or other non-core business activities.
The cost of revenue focuses exclusively on the expenses directly associated with producing and delivering the company's goods or services, such as raw materials, labor, and production-related overhead. Anything outside of this scope, particularly operational or administrative costs, is typically excluded.
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Types of Margins
When looking at the intermediate-level margins listed in an income statement, the cost of revenue produces the lowest margin. In order, these margins are noted below:
Contribution margin. The contribution margin only includes the direct costs within the cost of goods sold, resulting in a high contribution margin. This margin is rarely reported on an income statement.
Gross margin. The gross margin includes the traditional cost of goods sold, which includes factory overhead, and so yields a lower margin. This margin is commonly reported on the income statement.
Cost of revenue margin. The cost of revenue margin includes the traditional cost of goods sold, plus direct selling and marketing costs, and so yields the lowest margin. It is rarely included on an income statement.
Presentation of the Cost of Revenue
It is most useful to report the cost of revenue when there are substantial direct costs associated with sales. In these situations, the measurement may be reported for individual sales, rather than in aggregate, to show which customers are generating the highest (and lowest) margins. Usually, it is quite difficult to extract the cost of revenue from an income statement, since it is more oriented toward the reporting of gross margin.