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

An analyst forecasts a manufacturer's cost of goods sold. Raw material prices are contractually fixed for the next three years, but the company plans to shift production to a facility that has lower labor costs per unit. Which approach to forecasting the cost of goods sold is most appropriate?

The most appropriate approach is to forecast cost per unit by component, reflecting the cheaper labor, and multiply by expected volume. A constant historical percentage of sales would ignore the known labor saving, and holding COGS fixed ignores that most of it varies with output.

  1. AApply the historical average COGS-to-sales percentage unchanged
  2. BForecast COGS as a fixed amount equal to last year's figure
  3. CForecast COGS per unit by component, reflecting the lower labor cost, and multiply by forecast volumeCorrect

Explanation

When a known change affects the cost structure, a bottom-up forecast by cost component and volume captures it. A constant historical percentage would ignore the labor saving, and a fixed amount ignores the variable nature of COGS.

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