{"id":17223,"date":"2023-01-07T20:59:24","date_gmt":"2023-01-07T20:59:24","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17223"},"modified":"2026-06-02T17:06:08","modified_gmt":"2026-06-02T17:06:08","slug":"forecasting-costs","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/financial-reporting-and-analysis-fra\/forecasting-costs\/","title":{"rendered":"Forecasting Costs"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which factor is least likely to be considered when forecasting operating expenses?\",\r\n    \"text\": \"Which of the following is least likely a consideration when forecasting operating expenses? A. The variability of the cost. B. Relationship between sales and operating expenses. C. Tax rate.\",\r\n    \"answerCount\": 3,\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A. The variability of the cost.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"B. Relationship between sales and operating expenses.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"C. Tax rate.\"\r\n      }\r\n    ],\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is C. The tax rate is generally not considered when forecasting operating expenses because taxes are accounted for separately in financial projections. When forecasting operating expenses, analysts focus on factors such as the variability of costs and the relationship between sales and operating expenses to estimate future operating performance.\"\r\n    },\r\n    \"author\": {\r\n      \"@type\": \"Organization\",\r\n      \"name\": \"AnalystPrep\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/M-Yp1rD9Kf0\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n\r\n<h2>Forecasting COGS<\/h2>\r\n<p>The cost of goods sold (COGS) includes raw materials, direct labor, and overhead costs used in producing the goods. COGS is directly related to sales and forecasted as a percentage of sales. Historical data on a company\u2019s COGS as a percentage of sales provides a starting point for estimates.<\/p>\r\n<p>Since COGS is a relatively high cost, a small error in this item can significantly impact the forecasted operating profit. Analysts should consider whether analyzing these costs by segment, product, volume, and price components could improve forecasting accuracy.<\/p>\r\n<p>Some companies may face fluctuating input costs that can be passed on to customers only with a time lag. Analysts should also consider the impact of a company\u2019s hedging strategy. These strategies are revealed in the footnotes on the annual report.<\/p>\r\n<p>Competitors\u2019 gross margins can provide a good check for estimating a realistic gross margin, even though differences in business models can complicate direct comparisons.<\/p>\r\n<div style=\"margin: 18px 0;\"><a style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #2F5BFF; border-radius: 18px; color: #ffffff; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\">Strengthen your CFA Level II cost forecasting skills with our Free Trial.<\/a><\/div>\r\n\r\n<h2>Forecasting SG&amp;A<\/h2>\r\n<p>Selling, general, and administrative (SGA) expenses have a less direct relationship with a company\u2019s revenue. Certain expenses within SG&amp;A are more variable than others, e.g., selling and distribution expenses have a significant variable component and can be estimated as a percentage of sales. A lesser degree of variability can be found in other general and administrative expenses, such as employee overhead and research and development costs.<\/p>\r\n<p>To benchmark a company against its competitors, it is imperative to analyze the historical relationship between its sales and operating expenses. This can be used to compare a company&#8217;s efficiency and margin potential compared to its peers.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is <em>least likely<\/em> a consideration when forecasting operating expenses?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>The variability of the cost.<\/li>\r\n\t<li>Relationship between sales and operating expenses.<\/li>\r\n\t<li>Tax rate.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p>The correct answer is <strong>A<\/strong>.<\/p>\r\n<p>The tax rate is not considered when forecasting operating expenses.<\/p>\r\n<p><strong>A and B are incorrect<\/strong>. Both the variability of the costs and the relationship between sales and operating expenses are considered when forecasting operating expenses.<\/p>\r\n<\/blockquote>\r\n<p>Reading 17: Financial Statement Modeling<\/p>\r\n<p><em>LOS 17 (d) Demonstrate methods to forecasting cost of goods sold and operating expenses.<\/em><\/p>\r\n\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a><p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Access CFA Level II financial statement analysis study notes, practice questions, mock exams, and video lessons to strengthen your understanding of cost forecasting and financial statement modeling.<\/p><\/div>","protected":false},"excerpt":{"rendered":"Forecasting COGS The cost of goods sold (COGS) includes raw materials, direct labor, and overhead costs used in producing the goods. COGS is directly related to sales and forecasted as a percentage of sales. Historical data on a company\u2019s COGS...","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,402,431,429],"class_list":["post-17223","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-equity-valuation","tag-forecasting-costs","tag-reading-26-industry-and-company-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Forecasting Costs in Financial Analysis | AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how to forecast COGS and operating expenses, including key assumptions, cost drivers, and financial modeling techniques.\" \/>\n<meta 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