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. The following are all considered part of the cost of revenue:
- Cost of materials related to a product sale
- Cost of 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
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.
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:
- Contribution margin. Only includes the direct costs within the cost of goods sold, resulting in a high contribution margin.
- Gross margin. Includes the traditional cost of goods sold, which includes factory overhead, and so yields a lower margin.
- 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 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.