## Cost of Goods Sold Budget

### Learning Outcomes

• Prepare a cost of goods sold 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.

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

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.