{"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":"2024-04-04T10:55:30","modified_gmt":"2024-04-04T10:55:30","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":"<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<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","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 v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Forecasting Costs - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Understand how to forecast costs like COGS and operating expenses in financial analysis, including considerations for variability.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/financial-reporting-and-analysis-fra\/forecasting-costs\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Forecasting Costs - 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