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.