• Part way through the production process it is discovered that the cost assignment was inaccurate for product A and that there has been an underestimation of $150 per unit. They are unable to change the pricing because of contractual obligations.

What is the impact of this error in cost assignment if sales were as predicted?

My Answer

The company has a contractual obligation and therefore cannot amend its selling price.

The fact that the cost has been underestimated by $150.00 per unit, this outcome would result in a lower gross profit margin of $150.00 per unit.

In other words, the company would have to absorb this loss, in this instance the loss would be measured as follows:

Total decrease in Gross profit = Number of units sold x $150

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• What is the impact on income when the actual sales figures are used?

My answer

The selling Price of the company is bound by a contractual obligation and can therefore not be amended. So no impact to the sales figure will occur.

Cost of goods sold consists of all the costs associated with producing the goods or providing the services offered by the company. For goods, these costs may include the variable costs involved in manufacturing products, such as raw materials and labor.

The basic purpose of finding COGS is to calculate the "true cost" of merchandise sold in the period.

In this example the inventory cost for items produced for this specific customer will increase and therefore once identified each unit's costs will be increased by $150.00 in value.

So impact will be felt in revaluing the carrying value of inventory and cost of Sales at the time items are sold.

iS THERE ANYTHING THAT I NEED TO CHANGE IN RELATION TO MY RESPONSE