MERCHANDISING COMPANY – buys its inventory which is ready to sell CGS: purchase price
MANUFACTURING COMPANY – produces goods that sells CGS: MANUFACTURING COSTS** (or
inventoriable costs), that are divided into:
1) DIRECT MATERIALS: Raw materials & components parts used in production
2) DIRECT LABOR: Wages & other payroll costs employees
3) MANUFACTURING OVERHEAD: All manufacturing costs other than 1) and 2), such as
Factory utilities
Supervisor salaries
Equipment repairs
Depreciation on production machinery
**Often called PRODUCT COSTS
PRODUCT COSTS: Costs incurred to manufacture inventory
I. First reported in the BS as an asset (INVENTORY)
II. (Once sold) transferred in the IS – deducted from CGS
PERIOD COSTS: Operating Exp associated with time periods instead of the production of inventory
Selling Exp
General & Administrative Exp
Interest Exp
Income Taxes Exp
I. Reported in the IS – deducted from GROSS PROFIT
Three types of Inventory:
1. MATERIALS INVENTORY – raw materials on hand & available for use
2. WORK IN PROCESS INVENTORY – partial completed goods
3. FINISHED GOODS INVENTORY – unsold finished product ready to be sold
**Consider using perpetual inventory system – 6 general ledger accounts:
1) MATERIALS INVENTORY
Purchase of direct materials
Dr Materials Inventory
Materials placed into production
Dr Work in process inventory
CONVERSION
COSTS
PRIME
COSTS
