Question

in words non accounting major can understand can you tell me: For example, Home Depot sells hammers that it has purchased from a manufacturer/supplier. The Cost of Goods Sold would include not only the purchase of the hammer, but any freight costs to get it to Home Depot. Any purchase discounts would reduce the Cost of Goods Sold. If you saw that Home Depot's cost of hammer sales varied from one period to another, what do you think could be the cause or causes?

Answer 1

The causes for variation in cost of hammer sales from one period to another are as follows:

1. Bulk ordering: Generally, the suppliers tend to sell the goods at lower prices when the goods are purchased in bulk (in simple words wholesale basis).

2. Inflation: Inflation varies from period to period thereby effecting the purchasing power and thereby effecting a change in the cost of the goods.

3. Freight Rate Changes: The rate charged for transport of goods from one city to the other may undergo changes from one period to another on account of several reasons like reduction in the price of fuel etc.

4. Increased Purchase Discounts: Generally, when the goods are purchased in bulk, the discounts provided are higher.

5. Varied Sales: Sales vary from period to period and depending on sales, goods would be acquired there by effecting a change in the cost of goods sold between periods.

6. Changes in GST rates: When the rates of GST are changed, the costs would undergo a change too, thereby showing a varied trend of costs.

7. Competition: When there is excessive competition in the market, the cost of goods would undergo a change.