Comparing Merchandising
and Manufacturing Activities
Merchandisers . . .
Manufacturers . . .
 Buy finished goods.
 Buy raw materials.
 Sell finished goods.
 Produce and sell
finished goods.
MegaLoMart
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Manufacturing Costs
Direct
Materials
Direct
Labor
The Product
Manufacturing
Overhead
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Direct Materials
Those materials that become
an integral part of the product and
that can be conveniently traced directly to it.
Example: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easily traced
to individual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.
Examples: Indirect labor and indirect materials
Wages paid to employees
who are not directly
involved in production.
Examples:
maintenance workers,
janitors and security guards.
Materials used to support
the production process.
Examples:
lubricants and cleaning
supplies used in the
automobile assembly plant.
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Balance Sheet
Merchandiser
Current Assets:
 Cash
 Receivables
 Prepaid expenses
 Merchandise
Partially complete
inventory
products – some
material, labor,
or overhead
has been added.
Manufacturer
Current Assets:
 Cash
 Receivables
Materials
waiting to
be processed.
 Prepaid
Expenses
 Inventories
Raw Materials
Work in Process
Finished Goods
Completed products
awaiting sale.
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The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
+ Cost of merch.
purchased
Goods available
for sale
- Ending
merchandise
inventory
= Cost of goods
sold
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.
$ 14,200
+ Cost of goods
manufactured
234,150
Goods available
for sale
$ 248,350
- Ending
finished goods
inventory
(12,100)
= Cost of goods
sold
$ 236,250
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Manufacturing Cost Flows
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period
Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Expenses
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Product Costs – Raw Materials
Raw Materials
Manufacturing
Costs
Work
In Process
Beginning raw
materials inventory
Beginning inventory
is the inventory
carried over from
the prior period.
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Product Costs – Direct Materials
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
Ending raw materials
inventory
Direct materials used
Manufacturing
Costs
Work
In Process
Direct materials
As items are removed from
raw materials inventory
and placed into the
production process,
they are called direct materials.
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Product Costs –
Total Manufacturing Costs
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
Ending raw materials
inventory
Direct materials used
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
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Work
In Process
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
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Product Costs – Goods in Process
Raw Materials
+
=
–
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
Ending raw materials
inventory
Direct materials used
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Total manufacturing
costs
+ Beginning work in
process inventory
= Total work in
process
All manufacturing costs incurred
during the period are added to
the beginning balance of
work in process.
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Product Costs –
Cost of Goods Manufactured
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
– Ending raw materials
inventory
= Direct materials
used
Costs
associated
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Total manufacturing
costs
Beginning work in
process inventory
Total work in
process
Ending work in
process inventory
Cost of goods
manufactured
with the goods that
are completed during the period are
transferred to finished goods
inventory.
+
=
–
=
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Product Costs – Cost of Goods Sold
Work
In Process
+
=
–
=
Total manufacturing
costs
Beginning work in
process inventory
Total work in
process
Ending work in
process inventory
Cost of goods
manufactured
Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of
goods sold