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 indirect selling and marketing costs, such as the cost of a trade show, marketing brochure, or advertising campaign. These costs are not associated with a specific unit sold, only with general sales activity, and so cannot be considered a cost of revenue. Similarly, administrative costs are never included in the cost of revenue, since they are not directly associated with any individual unit sales.
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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.