Based on the content covered in Chapter 14 of the Wild, J., & Shaw, K. (2022) text, conduct an analysis of the cost of goods sold in manufacturing and merchandising companies. Students should address the following:
• A brief explanation of the differences in calculations made to determine the cost of goods sold in manufacturing vs merchandising companies.
• The cost of goods calculations to answer the following problem:
o The annual financial data at December 31, 2017, taken from two different companies are shown below:
Music World Retail Wave-Board Manufacturing
Beginning inventory
Merchandise $200.000
Finished goods $500,000
Cost of purchases 300.000
Cost of goods manufactured 875,000
Ending inventory
Merchandise 175,000
Finished goods 225.000
(a) Compute the “Cost of Goods Sold” section of the income statement at December 31, 2017, for each company. Include the proper title and format in the solution.
(b) Write a one-page memorandum to your instructor
(1) identifying the inventory accounts and
(2) describing where each is reported on the income statement and balance sheet for both companies.
Analysis of Cost of Goods Sold in Manufacturing and Merchandising Companies
Differences in Calculations for Cost of Goods Sold
In manufacturing companies, the cost of goods sold includes direct materials, direct labor, and manufacturing overhead costs. The calculation involves adding the beginning inventory of finished goods, deducting the ending inventory of finished goods, and including the cost of goods manufactured.
In contrast, for merchandising companies, the cost of goods sold comprises the cost of purchasing or manufacturing the products sold during the period. It includes the cost of merchandise purchased or produced and any beginning inventory, minus the ending inventory.
Cost of Goods Calculations
Given the financial data for Music World Retail and Wave-Board Manufacturing:
1. Music World Retail
Beginning inventory (Merchandise): $200,000
Cost of purchases: $300,000
Ending inventory (Merchandise): $175,000
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
Cost of Goods Sold = $200,000 + $300,000 - $175,000
Cost of Goods Sold = $325,000
2. Wave-Board Manufacturing
Beginning inventory (Finished goods): $500,000
Cost of goods manufactured: $875,000
Ending inventory (Finished goods): $225,000
Cost of Goods Sold = Beginning Inventory + Cost of Goods Manufactured - Ending Inventory
Cost of Goods Sold = $500,000 + $875,000 - $225,000
Cost of Goods Sold = $1,150,000
Memorandum to Instructor
Inventory Accounts and Reporting:
Music World Retail:
- Inventory Accounts: Beginning Inventory (Merchandise), Cost of Purchases, Ending Inventory (Merchandise)
- Reporting on Income Statement: Cost of Goods Sold section
- Reporting on Balance Sheet: Beginning Inventory (Merchandise) under Current Assets, Ending Inventory (Merchandise) under Current Assets
Wave-Board Manufacturing:
- Inventory Accounts: Beginning Inventory (Finished goods), Cost of Goods Manufactured, Ending Inventory (Finished goods)
- Reporting on Income Statement: Cost of Goods Sold section
- Reporting on Balance Sheet: Beginning Inventory (Finished goods) under Current Assets, Ending Inventory (Finished goods) under Current Assets
This analysis showcases the differences in calculating the cost of goods sold between manufacturing and merchandising companies and provides a clear breakdown of the cost of goods sold for Music World Retail and Wave-Board Manufacturing at December 31, 2017.