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Comparing Merchandising Click

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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 Direct Manufacturing

Materials Labor Overhead

The Product
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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 Materials used to support

who are not directly the production process.
involved in production.
Examples:
Examples: lubricants and cleaning
maintenance workers, supplies used in the
janitors and security guards. automobile assembly plant.
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Balance Sheet

Merchandiser Manufacturer
Current Assets: Current Assets:
 Cash  Cash
 Receivables  Receivables
Materials waiting to
 Prepaid expenses be processed.
 Prepaid Expenses
 Merchandise
Partially complete  Inventories
inventory
products – some Raw Materials
material, labor, Work in Process
or overhead Finished Goods
has been added.
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 Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Cost of merch. + Cost of goods
purchased 234,150 manufactured 234,150
Goods available Goods available
for sale $ 248,350 for sale $ 248,350
- Ending
- Ending
merchandise
finished goods
inventory (12,100)
inventory (12,100)
= Cost of goods
sold $ 236,250
= Cost of goods
sold $ 236,250
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Manufacturing Cost Flows

Income
Balance Sheet Statement
Costs Inventories Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Selling and

Period
Administrative Administrative
Costs Expenses
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Product Costs – Raw Materials

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Manufacturing Work
Raw Materials Costs 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

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Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
– Ending raw materials
inventory As items are removed from
= Direct materials used
raw materials inventory
and placed into the
production process,
they are called direct materials.
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Product Costs –
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Total Manufacturing Costs

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Conversion

materials inventory + Direct labor costs are costs
+ Raw materials + Mfg. overhead
purchased = Total manufacturing
incurred to
= Raw materials costs convert the
available for use direct material
– Ending raw materials
inventory
into a finished
= Direct materials used product.
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Product Costs – Goods in Process

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Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Total manufacturing

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
– Ending raw materials
inventory
= Direct materials used All manufacturing costs incurred
+ Direct labor costs
+ Mfg. overhead + Beginning work in
= Total manufacturing process inventory
costs = Total work in
process
during the period are added to
the beginning balance of
work in process.
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Product Costs –
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Cost of Goods Manufactured

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Total manufacturing

materials inventory + Direct labor costs
+ Raw materials + Mfg. overhead + Beginning work in
purchased = Total manufacturing process inventory
= Raw materials costs = Total work in
available for use process
– Ending raw materials – Ending work in
inventory process inventory
= Direct materials
Costs associatedused
with the goods that = Cost of goods
manufactured
are completed during the period are
transferred to finished goods
inventory.
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Product Costs – Cost of Goods Sold

Work
In Process Finished Goods

Total manufacturing Beginning finished

costs goods inventory
+ Beginning work in + Cost of goods
process inventory manufactured
= Total work in = Cost of goods
process available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of
manufactured goods sold