Cost of Sales Forecasting Once the expected sales have been determined, the next step is to look for trends and relationships among the various components of costs. For instance, one trend that often arises is a strong correlation between a given account and the level of sales. For these accounts, we can use a method called percent of sales forecasting. This is often the case with current asset and liability accounts, and variable costs as sales increase, these accounts will tend to increase proportionately. Variable costs are costs that rise and fall with revenue or activity. An example could be the cost of flour at a bakery which would tend to change in proportion with sales. It stands to reason that many current asset accounts, such as accounts receivable and inventory, and current liability accounts, such as accounts payable, would tend to increase or decrease proportionately with revenue. For our example with Metropolis Healthcare, we will assume that the cost of sales and many of the operating costs are variable. However, in practice, forecasting cost of sales and operating costs are normally the second-most important step in preparing a forecast, second only to forecasting the revenue, and the quality and usefulness of the forecast are heavily impacted by the level of detail and understanding that is given to the forecasting of cost of sales and operating costs. The primary costs that make up the cost of sales for Metropolis are employee costs, chemical costs, and supplies costs. Employee costs are forecast to be 20 percent of revenue, chemical costs are forecast to be 20 percent of revenue, and supplies costs are forecast to be 5 percent of revenue, for a total of 45 percent. With forecasted sales revenue of 220 for 2021, Q-1 what will be the forecasted cost of sales for 2021?