Cost of Revenue

Cost of revenue is the cost directly incurred in producing the product sold or services rendered. This amount includes the cost of the materials used in creating the product along with direct labor charges and other costs, like electricity expense, directly incurred in producing the product or service. Only direct costs incurred are considered here. Just like revenue, the corresponding cost of revenue is also calculated for a specific period like a quarter or a year. In fact, all income statement items are calculated for a similar time period.

Let’s suppose the raw material required to make a pizza – dough, cheese, vegetables etc – together cost Rs.50 per pizza. Electricity charge incurred in running the oven is Rs.30 per hour and the employee making the pizza gets paid Rs.20 for every pizza he makes. Assuming 6 pizzas can be made in an hour, the electricity charge incurred in making each pizza is Rs.5 (30/6). The cost of revenue is Rs.75 per pizza (50 + 20 + 5). So during the 1st quarter of 2018, Navya’s total cost of revenue was Rs.7,50,000 (10,000 * 75).  

Companies that are able to either maintain or decrease their cost of revenue in relation to their sales are desirable.

In case of industrial companies, the cost of revenue is calculated as total operating expense directly related to the goods and services provided. In case of utility companies, along with direct operating expense, operations & maintenance as well as fuel expense is considered.

In case of insurance companies, cost of revenue includes losses & benefits paid to policyholders, underwriting commissions and reinsurance expense.

In case of banks, cost of revenue is the sum of the total interest expense and non interest expense. Total interest expense is the interest paid on deposits and other borrowings. Non interest expense includes labour costs, foreign currency loss, litigation expense etc.