The cost of gross sales includes all the direct costs associated with the creation of the products or services sold. In manufacturing firms, those are the costs of the raw material used in production, the labor costs of the factory employees, the depreciation of the machinery and etc. For retailers, it will mostly include the costs related to the purchase of merchandise sold and often store rent and other occupancy costs. We can see that the cost of gross sales can be divided into two categories:

• Fixed costs: costs that will remain relatively stable upon a change in quantity sold, like store rent, since rent is usually not very dependent on the revenues of the store.
• Variable costs: costs that will change as quantity sold is changing, for example, raw materials used in the manufacturing process. The more units you manufacture, the more raw materials you will need.

If we have data regarding the fixed and variable costs distribution of the cost of gross sales, we can model those two costs categories differently. Fixed costs will usually change upon a significant change in expected revenues- for example, the company decides to build additional factory for its products, or close stores in unprofitable locations. Variable costs are forecasted very much like the process of revenue forecasting, quantity multiplied by price. As revenues forecasting is executed before the Cost of Gross Sales forecast, the quantity forecast should already be available, since the quantity of variable costs should be the same as the quantity of products/services provided. What is left to do is to forecast the price changes in the costs of the quantity sold, the same way we forecasted those changes in the revenue forecasting process.

If we cannot distinguish between fixed and variable costs, we will compute historical gross profit margins (gross profit margins divided by revenues). Then, we will try to understand the reasons for changes of those historical margins. Did they decreased because the price of the main row material used by the company increased and the company could not transfer this increase to its customers? Or did gross profit margins increased due to reorganization and improvement of the manufacturing process? It is important to understand if the margin in the most recent financial reports is extraordinary or is actually close to the representative gross margin which we can expect in the future.

Of course, a comparison to other companies in the industry is vital. It can show if the gross margin of companies in the industry is similar, and if the trend of change in gross margins is the same. For example, lest try to analyze 4 retailers in the Apparel & Accessories industry: