how cost of revenue works
cost of revenue is the total cost incurred to produce and sell a product or service it includes all the costs associated with the production process such as raw materials labor overhead expenses it also includes any other direct costs related to the production and delivery of the product or service cost of revenue is important for businesses because it helps them determine their true gross profit margin companies should be interested in know how much residual revenue is left over after all costs of making and selling a product have been incurred this residual profit is used to pay overhead or indirect costs still vital to the operation of the company but not directly tied to making a product formula and calculation of cost of revenuethe formula for the cost of revenue is cost of revenue cogs shipping costs commissions warranties returns other direct coststo calculate cost of revenue it s important to first decide what period to use many companies will calculate cost of revenue on a monthly or quarterly basis to use for decision making during the course of the year another important aspect of calculating cost of revenue is determine what the beginning inventory was at the beginning of the period this figure is required because it is an integral part of calculating the cost of goods sold last companies need to be mindful of the other category depending on the nature of the company the product line may have a diverse set of direct costs not every company will have the same direct costs and these direct costs may change from one period to the next as a company evolves its manufacturing process cost of revenue is not a gaap approved calculation and is not included on publicly issued financial statements 