Describe three issues/problems that a company could encounter when trying to determine the actual cost of a good or service to be used in the cost of goods sold. For each of your issues, provide an example of a company or industry where these issues could be present.
There are a number of issues or problems that a firm can encounter when trying to determine the actual costs of goods that it is selling.
One problem is the problem of determining how much of various workers’ compensation should be attributed to their work on a given project. For example, let us say that a drug company makes a variety of drugs. Their sales force goes out and tries to sell all of the drugs. How much of the money paid to the sales force should be attributed to each type of drug? This problem makes it harder to know what the cost of producing and selling each drug is.
A second problem is the fact that the prices of inputs can vary over time. For example, the Coca-Cola company buys huge amounts of sugar. Let us imagine that the price of sugar varies from purchase to purchase. It may be hard to determine the exact unit price of the sugar that goes into a particular run of soda.
Finally, the same problem can occur with fixed costs. If Coca Cola buys new machinery, how much of the cost of that machinery should be attributed to any particular lot of soda that is made?
These are some examples of reasons why it can be hard to determine the actual cost of producing and selling a particular good.