LEARNING CURVE

This chapter will enable you to: Identify the different types of companies. Explain the difference among the service company, merchandising company and the manufacturing company. Classify costs for a service company. Classify cost for a merchandizing company. Classify cost for a manufacturing company.

TYPES OF COMPANIES

There are 03 Main types of companies.

Service Company Merchandising Company Manufacturing Company

SERVICE COMPANY
Introduction: Service companies provide and sell services to customer. Service companies provide health care, communication, banking, and other important benefits to society. For examples firms such as FedEx, Goggle, and Citibank do not sell products; they sell services. Lately, many developed economies shifted their focus from manufacturing to service, and now services firms employ more than 50% of the work force.

Service Companies, such as TENAGA (energy supply), Telekom (telephone service), DIGI and CELCOM (cell phone service), Medical Clinic (medical services), Advocates ( legal services). Services companies seek to provide services with the following characteristics. * High quality * Reasonable price * Timely delivery Financial accounting focuses on financial statements for service companies. Services companies have the simplest accounting, since they carry no inventories of product for sale.

All of their costs are period costs, those costs that are incurred and expensed in the same accounting period.

Income Statement of Service Company

CellPhone Bhd Income Statement As at 31 Dec 2010 Revenue: Service Revenue Expenses: Salary expense 1800 Rent expense 1000 Utilities expense 400 Depreciation expenses furniture Depreciation building 200 Interest expense 100 Supplies expense 100 Total Expense Net Income

7600

300

3,900 3,700

Note: The above firm has no inventory and so the income statement has no Cost of Goods Sold .

MERCHANDISING COMPANIES

Merchandising companies resell the products they buy from suppliers. Merchandising companies such as Everrise, Boulevard buy consumable products to be sold to consumers. Merchandisers keep inventory of products, and managers are accountable for the purchasing, storage, and sale of the

Merchandising companies
Merchandiser income statement report the Cost of Goods Sold as the major expense. Merchandiser are to reflect the inventory product cost, because the products are held in inventory until sold. Merchandising companies include in its inventory product cost the cost to purchase the goods , custom duty and freight in.

THE COST OF GOODS SOLD = Opening stock + Purchases + Freight In Ending Stock.

Merchandising Company Income Statement

Boulevard Berhad Income Statement as at 31 December 2010 RM RM Sales 169,300 Less: Sales Return (2000) Less: Trade Discount (1400) (3400) Net sales Revenue 165,900 Cost of Goods Sold Opening Stock Purchases and freight In Closing Stock Cost of Goods Sold Gross Profit Operating expense Wage expense Rent expense Insurance expense Depreciation expense supplies expense Total operating expenses Interest Expense NET INCOME 0 131,000 (40,200)

(90,800) 75,100

10,200 8,400 1,000 600 500

(20700) (1,300) 53,100

MANUFACTURING COMPANY
Manufacturing companies make their own product for sales or transfer to other department at transfer pricing price. It uses labor, equipment, and facilities to convert raw materials into finished products. Managers in manufacturing companies must use these resources to create a product that customers want. It differs from service and merchandising firms, as it involves tracking costs on 3 kinds of inventory:
(1) Raw

material inventory it require raw materials in making product. (2) Work in progress goods not fully complete as finished product. (3) Finished goods goods completed but are NOT sold.

Manufacturing Companies
Types of Cost

Direct materials becomes a physical part of the finished product. The cost can be traced directly to the finished product.
Direct Labor the labor of employees who convert materials into the companys products. The cost can be traced directly to the finished product. Manufacturing overhead - includes all manufacturing costs other than direct materials and direct labor. - includes activities which incur costs such as indirect materials, indirect labor, repair and maintenance, utilities, rent, insurance, property taxes, depreciation on manufacturing plants, buildings and equipment. - manufacturing overhead is also called factory overhead or indirect manufacturing cost.

Schedule of cost of goods manufactured at 31 Dec 2010

Cost of Goods manufactured. Opening Direct materials Purchase of D/materials (include freight) Closing Direct materials Direct materials used Direct labor 70,000 350,000 (65,000) 355,000 169,000

Manufacturing overheads: Indirect materials 17,000 Indirect labor 28,000 Depreciation (plant/equipment)10,000 Plant utilities, insurance, tax 18,000
Total mfg cost incurred in the year Add: Opening work in progress Less: Ending work in progress Cost of goods manufactured c/f

(73,000) 597,000 80,000 ( 27,000) 650,000

Manufacturing Company Income Statement at 31 Dec 2010 Sales Revenue Less : Sales return Sales discount (120,000) (80,000) 0 650,000 ( 50,000) 1200,000 (200,000) 1000,000

Cost of goods sold: Opening Finished goods Cost of goods manufactured Ending Finished goods Cost of goods sold Gross Profit
Operating expenses: Wage Rent Insurance Depreciation Supplies expense Operating Income Interest Expense Net Income

(600,000) 400,000

120,000 100,000 10,000 6,000 5,000

(241,000) 159,000 ( 7,500) 151,500