Manufacturing involves combining direct materials, direct labor, and overhead to produce a new product. The good produced is tangible and can be inventoried and transported from the plant to the customer. A service is characterized by its intangible nature. It is not separable from the customer and cannot be inventoried. Traditional cost accounting has emphasized manufacturing and virtually ignored services. Now, more than ever, that approach will not do. Our economy has become increasingly service oriented. Managers must be able to track the costs of services rendered just as precisely as they track the costs of goods manufactured. In fact, a company’s controller may find it necessary to cost both goods and services as managers take an internal customer approach.
Directions
Classify the following types of firms as either manufacturing or service. Explain the reasons for your choice in terms of the four features of service firms (heterogeneity, inseparability, intangibility, and perishability).
Bicycle production
Pharmaceuticals
Income tax preparation
Application of artificial nails
Glue production
Childcare
Thesis Statement: The classification of firms as either manufacturing or service can be determined by considering the four features of service firms: heterogeneity, inseparability, intangibility, and perishability.
Introduction:
In today's economy, it is crucial for managers to accurately track the costs of both goods and services. Traditional cost accounting has predominantly focused on manufacturing, neglecting the unique characteristics of service firms. However, with the increasing importance of the service sector, it has become necessary to classify firms based on their nature and understand how the four features of service firms - heterogeneity, inseparability, intangibility, and perishability - shape their operations. By examining different types of firms, including bicycle production, pharmaceuticals, income tax preparation, application of artificial nails, glue production, and childcare, we can determine whether they fall under the category of manufacturing or service.
Body:
Bicycle Production:
Bicycle production can be classified as manufacturing. This is because the production process involves combining direct materials (such as steel frames and rubber tires) and direct labor (assembly workers) to create a tangible product. Bicycles can be inventoried and transported from the plant to the customer. Although there may be some customization options available for customers, the overall process remains consistent.
Pharmaceuticals:
Pharmaceuticals are also classified as manufacturing. The production of pharmaceuticals involves the combination of direct materials (chemical compounds) and direct labor (researchers and production workers) to create tangible products such as drugs. These products can be inventoried and transported to various distribution channels before reaching the end customer.
Income Tax Preparation:
Income tax preparation falls under the category of services. This is because it exhibits the four features of service firms. Firstly, income tax preparation services are heterogeneous, meaning that each customer's tax situation is unique and requires personalized attention. Secondly, these services are inseparable from the customer as they involve interacting with individual taxpayers to gather necessary information and file their taxes accurately. Thirdly, income tax preparation is intangible since it does not result in a physical product but rather in the completion of a financial task. Lastly, these services are perishable as they cannot be stored or inventoried due to their time-sensitive nature.
Application of Artificial Nails:
The application of artificial nails is categorized as a service. Similar to income tax preparation, this service exhibits the features of heterogeneity, inseparability, intangibility, and perishability. Each customer's nail requirements may vary, making this service heterogeneous. The application process requires direct interaction between the technician and the customer, making it inseparable. Additionally, the application of artificial nails does not result in a tangible product but rather in an enhanced aesthetic appearance. Lastly, since the application process is time-sensitive and dependent on immediate customer demand, it is perishable and cannot be inventoried.
Glue Production:
Glue production is classified as manufacturing. The production process involves combining direct materials (chemical compounds) and direct labor (production workers) to create a tangible product that can be inventoried and transported to customers. While different types of glue may exist to cater to specific customer needs, the overall production process remains consistent.
Childcare:
Childcare services are considered services due to their inherent characteristics. Firstly, childcare services are heterogeneous as each child requires individualized attention and care. Secondly, these services are inseparable from the customer as parents rely on childcare providers to take care of their children in their absence. Thirdly, childcare services are intangible as they do not result in a physical product but rather in the well-being and supervision of children. Lastly, since childcare services are time-sensitive and cannot be stored or inventoried, they exhibit perishability.
Conclusion:
By considering the four features of service firms - heterogeneity, inseparability, intangibility, and perishability - we can classify firms into manufacturing or service categories. Bicycle production and glue production fall under manufacturing due to their tangible nature, while income tax preparation, application of artificial nails, and childcare services are categorized as services due to their intangible nature and the presence of heterogeneity, inseparability, and perishability characteristics. Understanding these classifications is essential for managers to accurately track costs in both goods manufacturing and service provision industries.