What is Cost of Revenue? For many small businesses, the cost of revenue represents the bulk of their budget. For most businesses however, cost of revenue is only a small percentage of their total budget. While it is important to keep costs down as much as possible, there are times when the cost of revenue can be called upon to perform extremely tasks.
Cost of revenue is simply the sum of all expenses incurred in producing, promoting, and selling a business’s products and services to customers. If revenue is produced, expenses must be paid. If revenue does not occur, no expenses have to be paid. This means that if the business has a product or service that it does not sell, it does not have to pay for it. This gives businesses a great deal of latitude when it comes to expense management.
There are two basic questions to ask when calculating what is cost of revenue. The first question deals with how much the item or service actually costs to produce. A simple calculation is to take the revenue itemized and add all direct labor costs, plus the indirect costs associated with putting the product into production and shipping the item to the customer. This will give a very accurate measure of what is cost of revenue to the business. Anytime a service is purchased, direct labor costs are not factored in, but rather the indirect costs of getting the service to the customer. This will give a more accurate measurement of cost.
The second question deals with the price an item or service is worth to a business. If the product is overpriced or under priced, this will have a significant impact on businesses’ profits. Many businesses try to sell products or services at a discount in order to make up the lost profit. This can quickly drive a business into losses if the discount is not enough to cover the expense.
By understanding what is cost of revenue one can better manage the budget of the company. A business needs to understand what is cost of revenue in order to properly plan for expenses and understand how much money they are losing because of the overpricing or under pricing of their product or service. Proper costing of products and services is extremely important to a company and is a skill that can be taught over a period of time and is well worth the effort to learn.
A simple way to determine what is the cost of revenue for a product is to calculate the price divided by revenue. For example, a product that is used on a regular basis, such as paper, pens, or paper work should be less costly to produce than one that is new, but is used infrequently. This can help a business budget their product expenses. In most cases, a business can reduce what is cost of revenue by increasing the quality and quantity of their product while reducing prices for what is considered to be surplus production.
To illustrate this concept a little more, let’s say that you are a hardware store that sells a printer that costs about $500 dollars. You want to increase the number of cartridges that you sell per day to account for wastage. What is cost of revenue then if you raise the price per cartridge by fifty percent? It would seem like an increase, but once you account for the increased cost of operating the machine and paying wages to employees it becomes clear that your income from what is cost of revenue will actually decrease.
Understanding what is cost of revenue requires not only learning what is included in the expense, but also what is outside the expense. For example, sales people are often paid on a commission basis so what is the cost of revenue may include what is included in that commission and what is outside it. In most cases what is cost of revenue includes the cost of goods sold. What is cost of revenue does not necessarily mean what is the profit or loss. Cost of revenue can vary greatly depending on what is included and what is excluded in the calculation.