COGS
An organization may experience a number of problems in trying to determine the actual value of goods it has sold (cost of goods sold) over a certain period. These problems come from a number of factors such as described below.
Theft of inventory
When the company is ascertaining the cost of goods sold, it begins by ascertaining the value of the inventory at the beginning of the period and then adds in the cost of good acquired or purchased during its operation. This gives the organization the value of goods available for sale. At the end of the period, the company subtracts the value goods remaining unsold (closing inventory) from the value of goods available for sale (Fox, 2013). This is where the problem begins. By doing so, the company makes a fatal assumption that the firm has already sold inventory that is not anymore in the company. Such assumption can be misleading bearing in mind workers may have stolen or misplaced the inventory. This problem is common in retail business that buys and sells good to the customers such as Wal-Mart.
Fluctuation in prices
The fact that prices of goods and the raw material varies over time brings another problem (Fox, 2013). For example, PepsiCo procures large volumes of sugars for production of its variety of soft drinks. The variation in prices of sugar over time can makes it hard for the company to determine the exact unit price of this raw material that goes into a specific brand of soft drink.
Fixed cost allocation
This is a problem similar in nature to that of fluctuation in raw material prices (Fox, 2013). Assuming that PepsiCo procures a given production machinery, it becomes hard to ascertain how much cost to allocate to a given brand of soft drink. This forces the company to do arbitrary apportionment of the fixed cost.
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