The Cost of Sales Budget (CMV) projects the cost of the goods or services that a company expects to sell, according to its sales budget. Its correct elaboration is essential to determine the budgeted gross margin and evaluate the operating profitability. The calculation methodology is adapted to the nature of the business and the implemented cost systems.
The three elements of the CMV
- Initial Inventory: The value of products or goods available for sale at the beginning of the period.
- Cost of goods produced or purchased: the disbursement in production (manufacturing companies) or in the purchase of merchandise (trade companies) during the period.
- Projected Final Inventory: The estimated value of the products available at the end of the period.
CMV budget =
Initial Inventory + Cost of Goods Produced or Purchased − Projected Final Inventory
Production budget vs. CMV budget
It is crucial not to confuse both concepts: the production budget focuses on planning manufacturing activity, that is, the units to be produced to satisfy the projected demand and reach the desired ending inventory. The CMV budget, on the other hand, focuses on the total cost of the products that is expected to be sold during the period, considering the initial inventory available and the acquisitions or planned production.
How is it calculated according to the type of company
manufacturing companies: Calculation is more complex and requires considering direct materials, direct labor and indirect manufacturing costs. It is supported by two main methodologies: standard costing, which establishes predetermined costs per unit based on efficiency estimates, then comparing deviations versus real; and the actual or weighted average costing, which accumulates the costs actually incurred in each lot to determine the unit cost.
Marketing Companies: The CMV focuses on the cost of purchasing the goods, based on the expected purchase prices and the quantities necessary to maintain sufficient inventory. The management of optimal inventory levels and purchase policies are decisive in the accuracy of the budget.
service companies: Although they do not handle inventory of tangible products, they do budget for a cost of the services provided, which includes direct labor, materials used in projects and other specific costs, such as travel expenses.
In summary, the preparation of the CMV budget depends on the costing methodology and the operational nature of the company. Along with the sales budget, it establishes the gross margin: a critical indicator of profitability and the basis for financial planning and strategic decision making.
Clarus Council: The CMV budget, together with the sales budget, is the one that really defines its gross margin. Without a well calculated CMV, any profitability projection is just an illusion.
At Clarus Consultores we help you build a CMV budget adjusted to the operational reality of your company. Let’s talk about the accuracy of your projected gross margin.