Lesson 3 of 11 · All lessons in this module
- Disaggregated models: why and how to build a forecast valuation model
- Forecasting revenue: top-down, bottom-up and non-recurring items
- Forecasting operating costs: COGS, SG&A and segment margins
- Expense models: regressions, itemized costs and margin assumptions
- Working capital, capital investments and capital structure
- Asset and financing models: investment, financing needs and FCFE
- Integrated cases: a regional revenue build and richer financing assumptions
- Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
- Matching the model to the company: life cycle, distress and control
- From forecast statements to equity value: FCFF, terminal value and scenarios
- Integrated case: from assumptions to equity value, step by step
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 3 of 11 · 14 min
Forecasting operating costs: COGS, SG&A and segment margins
Operating cost forecasts are usually built on aggregated objects (cost of sales as a % of sales, SG&A split into variable and fixed parts, or segment margins), but they must stay coherent with the revenue forecast, including its product mix.
In short
- Cost disclosures are less detailed than revenue disclosures, so analysts use aggregated objects: COGS, SG&A, or summary measures such as segment EBITDA or operating margins.
- Coherence: if a low-margin product, segment or region grows faster, the overall margin should deteriorate, even if exact margins are unknown.
- COGS is forecast as a % of sales (gross margin). Because it is large, a few basis points matter; break it into volume and price components when input costs are volatile.
- Passing on an input cost increase in absolute amount keeps gross profit constant but lowers the gross margin %. Hedging and gradual price increases soften shocks.
- SG&A: selling and distribution costs are largely variable (% of sales); general corporate costs are largely fixed (grow with wage inflation).
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