Limitations of COGS
1. Overhead Allocations: COGS does not include all costs associated with business operations, such as certain overhead expenses. This can lead to an incomplete picture of total costs and may impact the accuracy of profitability assessments.
2. Varied Industry Practices: Different industries may have varying practices for calculating COGS, making direct comparisons between companies in different sectors challenging.
3. Dependence on Assumptions: The accuracy of COGS calculations depends on various assumptions, including the allocation of overhead costs. Changes in these assumptions can affect the reliability of COGS figures.
4. Potential for Manipulation: In some cases, businesses may manipulate COGS figures to portray a more favorable financial picture. This can involve decisions related to inventory valuation or the timing of recognizing certain costs.
5. Varied Inventory Valuation Methods: The choice of inventory valuation methods, such as FIFO, LIFO, or weighted average cost, can significantly impact COGS figures. This introduces variability and Complexity in financial reporting.
6. Incomplete Cost Picture: While COGS provides insights into direct production or acquisition costs, it may not capture all costs associated with bringing a product to market, such as marketing and distribution expenses. This can result in an incomplete cost picture.
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