COST OF SALES 177
It makes sense to run through a more complex example. You can modify this or scale it
down for your own business. Figure 8.5 shows an example manufacturing account. To be
pedantic, the penultimate line perhaps belongs in a trading account but it is included to
show the final cost of sales.
It is not too hard to follow the logic. The manufacturing of a single product takes place
at a dedicated facility. It is easy to identify all the costs directly associated with produc-
tion. These comprise variable costs (such as raw materials) which vary directly with the
volume of production, and fixed costs (such as rent paid for the factory).
COST OF MATERIALS
In just the same way as you explored sales, you can analyse your raw materials, com-
ponents and other supplies. Again, look for relationships between these and various
economic indicators. This time, you are looking both at volumes – for the way that supply
and demand affect prices – and at price indicators.
Economic forecasts usually include retail or consumer price and GDP deflators – which
are indices of inflation at the consumer and national level – and exchange rates. You will
also usually find indicators of labour costs. Obviously, you can use any or all of these to
help forecast price movements in your supplies. Trade and commodity producers associa-
tions sometimes produce useful data also.
OTHER PRODUCTION COSTS
Some other production costs are shown in Figure 8.5. These are projected in exactly
the same way as any other operating costs. To avoid duplication, I will defer discus-
sion of these production and operating costs until Chapter 9. When you read it you will
understand my logic. Skip forward now if you want to get straight down to forecasting
production costs. The remaining discussion in this chapter assumes that you have already
Indirect costs cannot be directly attributed to the cost of the product. They
include R&D, marketing and sales, and other administrative costs. These
are shown sep arately in trading or operating accounts which we look at in