[NorthMD00]

My problem is solving for budgeted total cost and expenses, I forget to include the increase in percentage from revenues that corresponds to costs and expenses.

Example: Widgets unit sales (expected) increase 7%. Cost of Widgets is expected to increase 5%.

Widget Sales $3,400,000 and Cost of Widgets Sales $2,300,000.

Correct me if I am wrong please: $3,400,000 x 1.07 = $3,638,000, then for Cost of Widget Sales $2,300,000 x 1.07(don’t know why I would include 1.07) x 1.05 = $2,584,050. (This is according to Wiley’s explanation. However I did change the numbers and percentages.)

I guess I just don’t understand why the 1.07 is included again for the Cost of Widget Sales. If anyone could add any input, it would be great. Also has anyone had a problem like this on the exam? Sorry if this sounds like a dumb questions, but I just need a little help.

[mandy8041]

I dont understand why either, unless the COGS is calculated as a percentage of sales (this is likely since it is for a budget)

FAR- 75
REG- 82
BEC- 73, 79!! Its over. Am I dreaming?
AUD- 74, 74, 88

[Anonymous]

Haven't started studying for BEC yet, but I think I understand what you're asking.

I think you would multiply by 1.07 because sales are supposed to go up by 7%. If sales remained the same and cost went up by 5%, then you would just multiply COGS by 1.05. But since sales are going up, COGS will also go up by 7%. If you increase your sales and costs are constant, then the cost of your sales also increases by the percentage that sales increases.

For example, sales are 100,000 and COGS is 50,000. Sales go up 10% so they are now 110,000 and the cost of sales remains unchanged. If I don't increase by COGS proportionately to what sales increased, this would imply my costs actually went down and didn't stay the same.

100,000 – 50,000 = 50,000 profit

110,000 – 50,000 = 60,000 profit

So my profit should not increase by the amount of the sale if costs are constant.

In my example, the correct profit should be…

Sales 100,000 + 10% = 110,000

COGS 50,000 + 10% = 55,000

Profit = 55,000

Notice the profit went up by the sales increase x GP percent (10,000 x 50%) = 5,000

I am not that great at explaining things, but I hope this was somewhat helpful.

[mavsbustin3s]

You have to increase your cost of widgets sales by 7% because this is a variable cost. As sales increase by 7% variable costs will also increase by 7%.

Another way to look at this problem is that in year 1 you sold 100,000 widgets each costing $34, so total sales were $3,400,000. The cost of each unit was $23 ($2,300,000/100,000).

If costs to produce each unit are going to increase by 5%, the new cost per unit is $24.15 ($23 x 1.05). If sales are going to increase 7%, new sales would be 107,000 units (100,000 x 1.07). Total sales would be $3,638,000 ($34*107,000). Cost of sales would be $2,584,050 ($24.15*107,000).

Hope this helps explain it a little better.

BEC - 85
REG - 77
AUD - 73, 83
FAR - 68, 89

[NorthMD00]

Ok, this is making more sense now. Thanks everyone

[Author]

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