Professional Documents
Culture Documents
09/14/2016
What are the most common business sectors and their activities?
Service, merchandising, and manufacturing companies
i.
Triple bottom line the companys performance is evaluated
not only in terms of profitability, but also in terms of its impact on people
and the planet. \
ii.
Service companies are in business to sell intangible services.
Health care, insurance, banking, etc.
Generally dont have inventory.
Incur costs to provide services, develop new services, advertise, and
provide customer service. (Salaries and benefits over 70% of costs).
iii.
Merchandising companies sell tangible products they buy
from suppliers.
Toys, clothing, electronics (resold at higher prices)
Retailers sell to customers.
Wholesalers buy products in bulk from manufacturers, mark up the
prices, and sell those products to retailers.
iv.
Manufacturing companies use labor, plant, and equipment to
convert raw materials into new finished products.
Toyota
Raw materials inventory all raw materials used in manufacturing.
Work in process inventory goods that are partway through the
manufacturing process but not yet complete.
Finished goods inventory completed goods that have not yet been
sold.
Services
Companies
Exam
ples
Primar
y Output
Types
of Inventory
Advertising
agenciesBanksLaw
firms
Insurance
companies
Intangible
services
None
Merchandising
Companies
M
Compa
Amazon.comKrogerWalmart
Wholesalers
Pr
Gamble
MillsDel
To
N
product
workers
equipm
materia
finished
R
invento
process
invento
goods in
i.
Cost object is anything for which managers want a separate
measurement of costs.
Individual units, different models, alternative marketing strategies,
geographic segments of the business, departments, a greet initiative, etc.
ii.
Costs are classified as either direct or indirect with respect to the
cost object.
Direct costis a cost that can be traced to the cost object.
Example: the cost object is one car. The cost of tires is a direct cost of
the vehicle.
Indirect costis a cost that relates to the cost object but cannot be
traced to it.
Example: cost incurred to run a manufacturing plant, including
utilities, property taxes, and depreciation.
If a company wants to know the total cost attributable to a cost object,
it mustassignall direct and indirect costs to the cost object.
Assigning a cost simply means that you are attaching a cost to the
cost object.
Tracing is to assign a direct cost to a cost object.
Allocateis to assign an indirect cost to a cost object.
The indirect cost is allocated evenly to all of the units produced in a
plant.
Assign direct and
indirect costs to cost objects
Trace direct costs to
cost objects
Allocate indi
cost objects
Amount of co
the cost object is le
Accounting Treatment
Type of CompanyService
company
Merchandising company
Manufacturing company
Inventoriable Product
Costs
Period co
Initially recorded as
inventory
Expensed as Cost of
Goods Sold only when
inventory is sold
Always recorded as an
expense
Never considered part of
inventory
Always rec
expense
Never con
inventory
None
All costs along the value
All costs a
chain
chain
For examp
depreciation exp
insurance, prope
advertising
Purchases of
merchandise
Freight-in; customs and
duties
All costs along the value
chain except for the purchases
element
For example: salaries,
depreciation expense, utilities,
insurance, property taxes,
advertising, and freight-out
All costs a
chain except for
purchases eleme
For examp
depreciation exp
insurance, prope
advertising, and
Direct materials
Direct labor
Manufacturing overhead
(including indirect materials,
indirect labor, and other
indirect manufacturing costs)
All costs along the value
chain except for the production
element
All costs a
chain except for
production elem
For examp
fright-out, all ex
executive headq
(separate from p
including deprec
utilities, insuran
property taxes,
Start with the beginning inventory and add to it all of the companies
inventoriable product costs for the period: the cost of the merchandise
purchased from manufacturers or distributors, freight-in, and any import
duties. The resulting total reflects the cost of all goods that were available
for sale during a period. Then subtract the cost of the products still in ending
inventory to arrive at the Cost of Goods Sold
Manufacturing companies
i.
The income statement for a manufacturer is essentially identical
to that of a merchandising company, the only difference is that the company
is selling product that it has made, rather than merchandise that it has
purchased.
Result: the calculation of Cost of Goods Sold is different.
Calculating cost of goods manufactured and cost of goods sold.
In order to calculate COGS, a manufacturer must first figure out the
amount of direct materials used and the cost of goods manufactured.
Cost of Goods Manufactured represents the cost of those goods that
were completed and moved to Finished Goods Inventory during the period.
Step 1: Calculate the cost of the direct materials used during the year
i.
Start with the beginning balance in the Raw Materials Inventory
and add to it all of the direct materials purchased during the year, including
any freight-in and import duties. This tells us the amount of materials that
were available for use during the year. Finally, subtract out the ending
balance of Raw Materials, to find the cost of the direct materials used.
Step 2: Calculate the cost of goods manufactured
i.
Start with the beginning balance in work in process and then add
to it all three manufacturing costs that were incurred during the year (DM
used, DL, and MOH). Then subtract out the goods still being worked on at
year end, to find the COGM.
Step 3: Calculate the cost of goods sold
i.
Start with the beginning balance of Finished Goods Inventory and
add to it the product that was manufactured during the year (CGM) to arrive
at the total goods available for sale. Then subtract what was left in Finished
Goods Inventory to get the COGS.
By analyzing what occurred in each other the three inventory
accounts, we are able to calculate the COGS shown on the companys
Income Statement.
Step 1 and 2 are sometimes combined into one schedule called the
Schedule of Cost of Goods Manufactured.
Sometimes all three steps are combined into a Schedule of Cost of
Goods Sold.
Comparing balance sheets
i.
The only difference in the three types of companies balance
sheets relates to how inventory is shown in the current asset section
A variable cost
Direct labor +
Manufacturing overhead =