Cost of Revenue

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Investing School  Mar 2  Comment 
The cost of sales is an important component of many businesses. It involves determining the cost of expenses necessary for the manufacturing of goods. Specifically, it refers to the cost of raw materials related to the manufacturing of goods...




 
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Cost of Revenue is the collective cost of manufacturing and distributing the products and services that a company sells.

Cost of Revenue is found in the income statement under operating expenses. Companies can exercise quite a bit of flexibility in defining what constitutes cost of revenue. In principle, any costs that is directly attributable to production and distribution of goods can be counted as cost of revenue. The term does not include indirect costs such as salaries, depreciation or other fixed costs.

Cost of Revenue is different from Cost of Goods Sold (COGS) since it usually includes ancillary costs such as distribution costs, product development costs and cost of providing after sales service. The term is especially used in service-based companies, such as consulting firms or software companies. This is because it is harder to separate cost of goods sold from distribution costs in these industries.

Example

The following excerpt from Microsoft's annual statement describes how the company calculates its cost of revenue:

Cost of revenue includes manufacturing and distribution costs for products sold and programs licensed, operating costs related to product support service centers and product distribution centers, costs incurred to drive traffic to our website and/or acquire online advertising space (“traffic acquisition costs”), costs incurred to support and maintain Internet-based products and services, warranty costs, inventory valuation adjustments, costs associated with the delivery of consulting services, and the amortization of capitalized research and development costs associated with software products that have reached technological feasibility. Cost of revenue increased during the three months ended December 31, 2008, reflecting increased online costs, including traffic acquisition costs and people costs, and increased Xbox 360 platform costs. Cost of revenue increased during the six months ended December 31, 2008, reflecting increased online costs, including traffic acquisition, data center and equipment, and people costs, and increased costs associated with the growth in our consulting services, partially offset by decreased Xbox 360 platform costs.


Cost of revenue (highlighted) is found in the income statement under operating expense.

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Example: Cost of revenue for Microsoft (MSFT) For The Fiscal Year Ended June 30, 2008, Form 10-K


Cost of Revenue data on Wikinvest

Cost of Revenue data on Wikinvest always excludes depreciation even if the company reports the number with depreciation. Depreciation, on Wikinvest, is reported separately in the operating expenses section of the Income Statement. This treatment provides greater transparency and comparability. However, this treatment, in some cases, result in a different value from that reported on Yahoo! Finance, Google Finance and the Company's 10-K. To illustrate how not including depreciation improves transparency, consiir margins, an investor should either add depreciation to company XYZ's cost of sales, or subtract depreciation from BCD's cost of sales. Wikinvest choses the latter treatment.

Another example: a company spends $500,000 in producing widgets and spends another $100,000 in sales commission. The Cost of goods sold for this firm would be $500,000 but Cost of revenue would be $600,000

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