Skip to content

CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling

An analyst building a financial statement model forecasts cost of goods sold (COGS) for a manufacturer whose raw material prices are volatile and whose production is largely variable. Which approach to forecasting COGS is most appropriate?

The most appropriate approach is to forecast COGS as a percentage of revenue and adjust it for expected input price changes. COGS is mostly variable and moves with sales volume, while the adjustment reflects volatile raw material prices. A constant amount or inflation-only growth ignores the volume link.

  1. AHold COGS constant in absolute currency terms
  2. BForecast COGS as a percentage of revenue, adjusted for expected input price changesCorrect
  3. CGrow COGS at the inflation rate regardless of sales volume

Explanation

Because COGS is largely variable, it moves with sales volume, so a percentage-of-revenue (gross margin) approach is natural. Adjusting for expected input price changes captures the volatile raw materials. Holding COGS constant or tying it only to inflation ignores the link to volume.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Financial Statement Modeling shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Financial Statement ModelingFree diagnostic mock

More Introduction to Financial Statement Modeling questions