I am very frustrated. I am taking one summer class on Financial Management and our professor is making us do a 2-statement forecast (apparently, basic cash flow projection is too hard, so balance sheet is not balanced at all, lol).
I was taught by WallStreetPrep and few banking models that COGS is 100% variable cost. If Revenue goes up by 10%, COGS goes up by 10% or somewhat similar.
My professor says I am wrong. He said COGS includes things like CEO's salaries and others that are constant (aren't they in SG&A?). He said COGS has a variable part, that is a certain percentage of revenue (for example, 60% of revenue is variable part of COGS). COGS also has a fixed part: a percentage of previous year's COGS.
What is Variable and Fixed Cost of Goods Sold?
While the vast majority of COGS expenses are variable costs, in some cases (especially for companies that are manufacturers) there is a fixed cost associated with the production of goods such as the utilities at the manufacturing plant. The cost of keeping the lights on and running AC, will be the same whether you manufacture 100 gadgets or 10,000 gadgets (unless overtime is factored in). It is important note that there is a difference between the cost of lighting your office building where management works (which would fall under SG&A expenses) and the cost of lighting your plant where you produce the goods (which would fall under COGS).
Therefore, variable costs will represent the majority of cost of goods sold and there will be a small portion of fixed costs. However, when modeling - due to the small portion that this will make up, it is safe to model as if COGS is a variable percentage.
At a simple level, the cost of goods sold is the beginning inventory for a period + the purchase or manufacturing of goods - the ending total of goods. This will be the COGS sold and represents the cost to purchase or create the goods that you sold during the period. You can see a video about this below.
Read More About COGS on WSO
- Depreciation in COGS and EBITDA
- Accounting Question: COGS Increases by $10 and Revenue goes up $20?
- Cost of Goods Sold (COGS) Urgent Quick Question
Preparing for Investment Banking Interviews?
The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.