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).
a. Bicycle production b. Pharmaceuticals
c. Income tax preparation
d. Application of artificial nails
e. Glue production
f. Childcare
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Understanding the Classification of Firms: Manufacturing vs. Service
Understanding the Classification of Firms: Manufacturing vs. Service
In classifying firms as either manufacturing or service-oriented, it is essential to consider the distinct characteristics of each type of business and how they align with the features of service firms, namely heterogeneity, inseparability, intangibility, and perishability. Let's analyze the classification for each of the following types of firms:
a. Bicycle Production
- Classification: Manufacturing
- Reasoning: Bicycle production involves combining direct materials, labor, and overhead to create a tangible product that can be inventoried and transported. The end product (bicycles) is tangible and can be physically separated from the production process.
b. Pharmaceuticals
- Classification: Manufacturing
- Reasoning: Pharmaceuticals are tangible products that are produced using direct materials and labor in a manufacturing setting. The end products (medications) can be inventoried and transported to customers.
c. Income Tax Preparation
- Classification: Service
- Reasoning: Income tax preparation is an intangible service that is provided directly to customers. It is inseparable from the customer, as it involves personalized assistance with tax-related matters. The service is heterogeneous, as each customer's tax situation is unique.
d. Application of Artificial Nails
- Classification: Service
- Reasoning: The application of artificial nails is a service that involves direct interaction with customers to enhance their appearance. It is inseparable from the customer and requires personalized attention. The service is intangible and cannot be inventoried.
e. Glue Production
- Classification: Manufacturing
- Reasoning: Glue production involves manufacturing a tangible product (glue) using direct materials, labor, and overhead. The end product can be inventoried and transported to customers for use.
f. Childcare
- Classification: Service
- Reasoning: Childcare is a service characterized by its intangible nature and inseparability from the customer. It involves personalized care for children and is heterogeneous, as each child's needs may vary. Childcare services are perishable and cannot be stored for future use.
In conclusion, understanding the distinction between manufacturing and service firms is essential for accurately classifying businesses based on their operational characteristics and customer interactions. By considering the features of service firms, such as heterogeneity, inseparability, intangibility, and perishability, managers can effectively differentiate between manufacturing and service-oriented enterprises.
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