Cost of Goods Sold Budget

Learning Outcomes

  • Prepare a cost of goods sold budget
A flowchart titled “Types of Budgets”. The cost of goods sold budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash budget.

The cost of goods sold budget establishes the forecast for the inventory expense and is usually one of the largest expenses on an income statement. A cost of goods sold budget would not be necessary for a service company since they do not sell a product. Management must now prepare a schedule to forecast the cost of goods sold, the next major amount in the planned operating budget. We need to understand the costs for making the product. GelSoft has the following costs:

Direct Materials $  7.48 per unit (0.68 kg * $11)
Direct Labor $  10.00 per unit (0.25 hrs * $40)
Variable Overhead $  1.20 per unit
Fixed Overhead $  3.80 per unit ($602,694/39,651 hours * 0.25 hours/unit)


The variable and fixed overhead allocations can be combined to one $5.00 rate that is 0.25 * the $20 combined allocation per hour because each unit takes ¼ hour of labor.

The total combined cost per unit would then be $7.48 +$10.00 + $5.00 = $22.48 cost per unit.

As with all of the other components of the operating budget so far, the cost of goods sold budget is driven by the sales budget in units. Let’s assume the company is using a First-In, First-Out (FIFO) assumption for finished goods inventory and that the unit cost of beginning inventory is $20, so the 30,000 units in beginning inventory carry a cost basis of $600,000.

All of the units produced in the current year carry a cost basis of $22.48 per unit.

GelSoft Cost of Goods Sold Budget – FIFO
Description Q1 Q2 Q3 Q4 Year
Sales in Units 40,000 42,000 44,100 46,305 172,405
Less: Beginning inventory sold 30,000 30,000
Current product sold Single Line10,000Double line Single Line42,000Double line Single Line44,100Double line Single Line46,305Double line Single Line142,405Double line
Cost of beginning inventory sold @$20 $   600,000 $         – $         – $         – $   600,000
Cost of current product sold @$22.48 224,800 944,160 991,368 1,040,936 3,201,264
Single Line$   824,800Double line Single Line$   944,160Double line Single Line$   991,368Double line Single Line$ 1,040,936Double line Single Line$ 3,801,264Double line


For a bit more information on how cost of goods sold is calculated, watch this video:

You can view the transcript for “Cost of Goods Sold (COGS)” here (opens in new window).

After managers forecast cost of goods sold, they prepare a separate budget for all selling and administrative expenses. First, check your understanding of calculating cost of goods sold based on the sales and production schedules.

Practice Question