Cost of revenue is one of the major components of an income statement. Learning about the details of the same helps business owners to ascertain the direct costs related to the goods and services offered by the company. In turn, it helps in profit calculation and allows business owners to optimise the same successfully. Understand the complete concept with the cost of revenue examples.
It can be defined as the cost of manufacturing, production, and distribution of goods and services of a company to consumers. Notably, as a concept, it is more than the cost of products sold and tends to include certain activities associated with a sale.
The types of cost of revenue from operations typically depend on the company.
Here are the most prominent types –
It must be noted that a service-oriented firm does not incur any material expenses. Typically, its costs are concerned with the labour force. With that being said, the following are the most prominent cost of revenue examples in a service-oriented company.
Nonetheless, to compute the cost of revenue from operations, one must also become familiar with the exclusions. Typically, indirect expenses, administrative costs, and research and development costs are not included in the computation.
Before taking a quick look at the calculation of the cost of revenue examples, one must keep the following pointers in mind.
Cost of revenue examples: Suppose, the revenue of a firm for the year 2018-2019 is Rs.20,00,000, direct material is Rs.380,000, labour cost is Rs.250,000 and research and development cost is Rs.350,000. Also, freight and handling charge is Rs.36,000; indirect expenses amount to Rs.123,000, direct cost is Rs.17,500, and admin charge is Rs.200,000.
So, the cost of revenue is –
= Direct material + direct labour + direct costs + freight and handling charges
= Rs.(380000 + 250000 + 175000 + 36000)
One can also compute the cost revenue ratio of a firm by taking a quick look at its income statement. Typically, such a ratio is calculated by dividing cost by revenue and is expressed as –
Cost revenue ratio = Cost / Revenue
At any given time, a lower cost revenue ratio indicates more proficiency than a higher ratio.
It proves useful in more than one way. The following pointers highlight its significance.
By calculating the cost of revenue, one can also ascertain the direct costs involved with a firm’s production and distribution.
One can easily compute the gross profit of a firm with the help of its cost of revenue. To elaborate, by simply subtracting the cost of revenue from total revenue, one can ascertain the gross profit of a firm.
Cost of revenue helps to identify all the direct and indirect costs of production of a firm. In turn, it aids business owners to identify excess expenses and adjust them accordingly.
Usually, the terms cost of goods sold and cost of revenue are used interchangeably. However, there is one fundamental difference between the two that sets them apart from one another.
To elaborate, the expense related to marketing and distribution is not factored in for the cost of goods sold. Notably, the primary difference tends to lay in their usage.
For instance, manufacturers are more likely to factor in COGS, and on the other hand retailers of service-oriented businesses are more likely to account for the cost of revenue. It is because they cannot record the intangible items on their income statements or relate the same with operating expenses.
Bearing these in mind, business owners must utilise this crucial component in their favour. In turn, they will be able to account for the operational cost better and subsequently improve upon their efficiency significantly.