Cost of Revenue – Definition & Meaning

Cost of Revenue (often referred to as Cost of Goods Sold, COGS) represents the total expenses directly tied to producing and delivering a company’s products or services. It excludes broader overhead costs but covers everything needed to generate sales.

Key Takeaways

In one sentence: Cost of revenue shows the direct expenses linked to generating sales.
Why it matters: It helps investors measure profitability by comparing revenue against the direct costs of production.
Context/usage: Reported on the income statement directly under revenue.
Synonym: Frequently called Cost of Goods Sold (COGS) in financial reporting.

What Is Cost of Revenue?

Cost of revenue includes all costs directly attributable to producing goods or delivering services. For manufacturers, this usually means raw materials, direct labor, and production costs. For service or software companies, it may include hosting, support, or licensing fees tied directly to customer usage.

It excludes broader administrative, selling, and general corporate costs, which are reported separately as SG&A (Selling, General, and Administrative expenses).

How Cost of Revenue Works

Cost of revenue is a crucial component of the income statement. It links directly with revenue to determine gross profit:

Cost of Revenue = Total Operating Expenses – Selling General Administrative

In other words, take the total operating expenses and subtract SG&A. What remains are the costs directly tied to making and delivering what the company sells.

Example

A manufacturing company spends $500M on raw materials and labor.
SG&A is $200M, and total operating expenses are $800M.
Cost of Revenue = $800M – $200M = $600M.

Gross profit can then be calculated as:
Revenue – Cost of Revenue = $1B – $600M = $400M.

Benefits and Considerations

Benefits:
- Provides insight into efficiency of production or service delivery.
- Allows calculation of gross profit margins – a key metric for profitability.
- Helps compare companies across industries with similar cost structures.
Considerations:
- Different industries classify costs differently (e.g., tech firms may include hosting costs in cost of revenue).
- Overhead or indirect costs are not part of cost of revenue but still affect overall profitability.
- Investors should evaluate trends: rising cost of revenue as a percentage of sales may signal inefficiency.

Related Terms

Revenue – total money earned from sales before expenses.
Gross Profit – revenue minus cost of revenue.
Operating Expenses (OPEX) – broader costs, including SG&A, beyond production.
Gross Margin – profitability ratio calculated as (Revenue – Cost of Revenue) ÷ Revenue.

Cost of Revenue