Cost of revenue is the total amount of capital it takes a company to manufacture and distribute a product to the public. These costs are the ones directly associated with the sale of a product, as opposed to indirect costs like salaries paid to employees. Companies list cost of revenue in their income statement as a part of their operating expenses, and they need to generate enough income to outstrip these costs in order to turn a profit. Such costs go beyond the simple manufacturing costs and, as such, are the best measurement of the complete process of selling a product to the public.
A company must try to manage its costs so that it eventually makes a profit, with total sales ideally being larger than the total amount of capital it takes to run the business. These costs can include salaries and depreciation of assets, as well as other fixed costs that the company must endure to maintain daily operations. By contrast, cost of revenue refers directly to the cost of making and selling goods to the public.
The most obvious component of cost of revenue is the cost that a company must incur to actually manufacture the products that it sells. This measurement is also known as cost of goods sold, and it is one way in which a company can judge its efficiency in producing its goods and services. If a company can keep these costs low, it may be able to incur larger costs in other areas as a means of selling its products.
It is important to realize that the cost of revenue goes well beyond the cost of goods sold. For example, there are costs of distribution attached to getting the products from the place where they were manufactured to where they can be sold. In addition, these extraneous costs can include marketing costs, by which a company alerts the public about the products it plans to sell. Commission costs owed to salesmen may also be included in these costs.
As it includes every step in the process by which products are created and sold, cost of revenue is often the measurement that financial experts and investors use when making an assessment of a company. While cost of goods sold is certainly important, it falls short by leaving out costs that can be quite significant. This is especially true of companies in the service industry, where the costs of manufacturing and distributing products are difficult to separate.
