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Building Financial Models with Microsoft® Excel®: A Guide for Business Professionals, Second Edition by K. Scott Proctor

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Chapter 3. Operating Budget—Cost of Goods Sold, Inventory, and Purchases

This chapter covers the first set of cost components for the Operating Budget, specifically the Cost-of-Goods-Sold Budget, the Inventory Budget, and the Purchases Budget. Whereas Chapter 2 addressed the sales components of the Operating Budget, this chapter, in conjunction with Chapters 4 and 5, addresses the budgets (in the Operating Budget) associated with planning for and purchasing the resources required to support a business's sales. Figure 3.1 highlights the separate Cost of Goods Sold, Inventory, and Purchases components of the Operating Budget in the context of the Master Budget.

As in Chapter 2, I use the Assumptions and Dashboard worksheet for Napavale to introduce and focus on important assumptions underlying Napavale's financial model. The remainder of this chapter will cover the steps involved in the continued construction of the Assumptions and Dashboard worksheet and the Cost of Goods Sold, Inventory, and Purchases elements of the Operating Budget.

STEP 3: COST-OF-GOODS-SOLD BUDGET

The first cost-oriented step in building Napavale's financial model, labeled Step 3 in Figure 3.1, is developing a Cost-of-Goods-Sold Budget. This bud-get is most applicable to product-oriented companies (as opposed to service-oriented companies), as service-oriented companies do not typically sell "goods." Some service-oriented companies refer to the cost of selling their service(s) as the "cost of revenues." In other ...

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