Comparing Merchandising and Manufacturing Activities

1
Comparing Merchandisingand Manufacturing
Activities
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• Merchandisers . . .
• Buy finished goods.
• Sell finished goods.

• Manufacturers . . .
• Buy raw materials.
• Produce and sell finished goods.

2
Manufacturing Costs
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The Product
3
Direct Materials
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• Those materials that becomean integral part of
  the product andthat can be conveniently traced
  directly to it.

Example A radio installed in an automobile
4
Direct Labor
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• Those labor costs that can be easily traced to
  individual units of product.

Example Wages paid to automobile assembly
workers
5
Factory Overhead
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• Manufacturing costs that cannot be traced
  directly to specific units produced.

Examples Indirect labor and indirect materials
6
Balance Sheet
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• Merchandiser
• Current Assets
• Cash
• Receivables
• Prepaid expenses
• Merchandise inventory

• Manufacturer
• Current Assets
• Cash
• Receivables
• Prepaid Expenses
• Inventories
• Raw Materials
• Goods in Process
• Finished Goods

7
The Income Statement
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• Cost of goods sold for manufacturers differs
  only slightly from cost of goods sold for
  merchandisers.

8
Manufacturing Cost Flows
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Income StatementExpenses
Balance Sheet Inventories
Costs
Material Purchases
Raw Materials
Goods in Process
Direct Labor
FactoryOverhead
Cost of GoodsSold
FinishedGoods
Selling andAdministrative Expenses
Selling andAdministrative
PeriodCosts
9
Product Costs Raw Materials
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Beginning inventory is the inventory carried over
from the prior period.
10
Product Costs Direct Materials
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As items are removed fromraw materials
inventory and placed into theproduction
process,they are called direct materials.
11
Product Costs Total Manufacturing Costs
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Conversion costs are costs incurred to convert
the direct material into a finished product.
12
Product Costs Goods in Process
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All manufacturing costs incurred during the
period are added tothe beginning balance
ofgoods in process.
13
Product Costs Cost of Goods Manufactured
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Costs associated with the goods that are
completed during the period are transferred to
finished goods inventory.
14
Product Costs Cost of Goods Sold
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