What is Cost Of Revenue?
781 reads · Last updated: December 5, 2024
The term cost of revenue refers to the total cost of manufacturing and delivering a product or service to consumers. Cost of revenue information is found in a company's income statement. It is designed to represent the direct costs associated with the goods and services the company provides. The service industry often favors using the cost of revenue metric because it is a more comprehensive account of the various costs associated with selling a good or service.
Definition
Operating costs refer to the total expenses incurred in manufacturing and delivering products or services to consumers. These costs include expenses directly related to the production process, such as material costs, labor costs, and manufacturing expenses. Operating cost information is typically included in a company's income statement and aims to represent the direct costs of goods and services provided by the company.
Origin
The concept of operating costs developed alongside the evolution of modern accounting systems. While the earliest accounting records date back to the Middle Ages, the modern understanding of operating costs was refined after the Industrial Revolution, as businesses expanded and production processes became more complex.
Categories and Features
Operating costs can be divided into fixed costs and variable costs. Fixed costs are those that do not change with the level of production, such as rent and equipment depreciation. Variable costs change with the level of production, such as raw materials and direct labor. The main features of operating costs are their directness and traceability, which help business managers in cost control and profit analysis.
Case Studies
For example, Apple's operating costs include the material costs, assembly costs, and shipping costs for producing iPhones. By effectively managing these costs, Apple can maintain high profit margins. Another example is Starbucks, whose operating costs include coffee bean procurement, employee wages, and store rent. Starbucks controls operating costs by optimizing its supply chain and improving operational efficiency.
Common Issues
Common issues investors face when analyzing operating costs include distinguishing between fixed and variable costs and assessing the impact of operating costs on a company's profitability. A common misconception is equating operating costs with total costs, overlooking the impact of indirect expenses.
