Question

Given that have made your best prediction of next year's sales and you want to estimate next year's COGS, What TWO pieces of information do you require and why ?

Answer 1

First of all we need to understand what is COGS.

COGS stands for Cost of Goods SOld. It is the cost of the sold goods not the sales value.

The difference of Sales Value and COGS is called gross profit.

The following information is required to find out the COGS,

--- Need Estimated Sales Value for next year

--- Need Gross Profit Ratio which company wants to maintain next year.

Why ?

If we get the two above information i.e. estimated sales and gross profit ratio then we can easily calculate the COGS.

COGS = Sales Value x (1 - Gross Profit Ratio)