Difference Between Merchandising and Manufacturing Entities

Differences between merchandising and manufacturing entities A merchandising entity (typically a retailer or wholesaler) purchases goods and then resells them. The inventory they carry is comprised of goods purchased waiting to be resold. The cost of goods sold in a given period is calculated as follows: Opening inventory $120,000 Purchases 790,000 Less ending inventory (160,000) Cost of goods sold $750,000 A manufacturing entity, on the other hand, manufactures the inventory it sells. Its cost of goods sold is calculated as follows: Opening finished goods inventory $450,000 Cost of goods manufactured1,400,000 Less ending finished goodsinventory (580,000) Cost of goods sold $1,270,000 Cost Classifications We define a cost object as anything we want to know the cost of. If we want to know how much it costs to produce Product X, then Product X is the Cost Object. If we want to know how much it costs to offer an Introductory Management Course, then the Introductory Management Accounting Course is the cost object. Product vs. period costs: • a product cost is defined as any costs incurred, either directly or indirectly, in the manufacture of a product or the delivery of a service. These consist of direct materials, direct labour and manufacturing overhead. Product costs are inventoried in the sense that they flow through the direct materials, work in process and finished goods accounts and are only released to the income statement when the finished goods inventory is sold. • period costs are comprised of all other costs (i.e. all nonmanufacturing costs) and typically include all selling, distribution and administrative costs. Period costs are expensed in the period incurred. Manufacturing Costs -Costs to manufacture a product or deliver a service fall into three distinct categories: 1. Direct materials - materials that become an integral part of the finished product; 2. Direct labour - the cost of hands-on labour in a production process, and 3. Manufacturing Overhead - all other manufacturing costs. These would include indirect materials, indirect labour, electricity, rent, depreciation,and any other costs that are indirectly incurred in the cost of manufacturing. Prime costs are defined as the sum of direct labour and direct materials used.