1.
Manner of Operation
Manufacturing business: Creates products by transforming raw materials into finished goods. They
have production processes, often involving machinery and equipment.
Merchandising business: Buys finished goods from suppliers and sells them to customers. They
primarily engage in buying and selling activities.
2. Inventory Accounts in a Manufacturing Business
Raw materials inventory: The cost of materials used in the manufacturing process.
Work in process inventory: The cost of partially completed products.
Finished goods inventory: The cost of completed products ready for sale.
Cost of goods sold: The cost of goods sold during the period.
3. Examples of Manufacturing Businesses
Automobile manufacturers (Toyota, Honda, Ford)
Electronics manufacturers (Samsung, Apple, LG)
Food and beverage manufacturers (Coca-Cola, Nestle, Unilever)
Pharmaceutical manufacturers (Pfizer, Merck, Johnson & Johnson)
4. Elements of Product Cost
Direct materials: Materials directly traceable to the product.
Direct labor: Labor directly involved in the manufacturing process.
Manufacturing overhead: Costs incurred in the manufacturing process but not directly traceable to
specific products.
5. Product Cost vs. Period Cost
Product cost: Costs associated with creating a product, which are expensed when the product is
sold.
Period cost: Costs incurred in a specific period but not directly related to the production
process. They are expensed in the period incurred.
6. Period Costs
Selling expenses: Costs related to selling products.
Administrative expenses: Costs related to managing the overall business.
7. Examples of Distribution Costs
Sales salaries and commissions
Advertising expenses
Shipping costs
Sales office rent
8. Direct Materials vs. Indirect Materials
Direct materials: Materials directly traceable to the product.
Indirect materials: Materials used in the manufacturing process but not directly traceable to
specific products.
9. Direct Labor vs. Indirect Labor
Direct labor: Labor directly involved in the manufacturing process.
Indirect labor: Labor supporting the manufacturing process but not directly involved in creating the
product.
10. Direct Cost vs. Indirect Cost
Direct cost: Costs directly traceable to a specific product or activity.
Indirect cost: Costs not directly traceable to a specific product or activity.
11. Additional Financial Report
Statement of cost of goods manufactured: This report shows the cost of goods produced during
the period.
12. Asset Accounts Unique to Manufacturers
Property, plant, and equipment (e.g., factory buildings, machinery)
Work in process inventory
Finished goods inventory
13. Selling Price of Manufacturer vs. Distributor/Retailer
Manufacturers generally have lower selling prices due to:
o Lower overhead costs (e.g., no retail stores)
o Selling in bulk quantities
o Potential for economies of scale
14. Pricing Methods and Mark-up Rates
Cost-plus pricing: Determining the selling price by adding a markup percentage to the product cost.
Market-based pricing: Setting the selling price based on market conditions (supply and demand).
Cost-plus pricing typically has a higher markup rate because it directly links the price to the cost of
production.However, market-based pricing can be more effective in competitive markets where
customers are price-sensitive.
