Question

1.Explain (by giving examples) the difference between accounting treatment of costs for a service company versus that for a manufacturing company.

2.How does the flow of costs & its accounting differ or are similar in these two sectors? What implications does this have on changes in equity?

Answer 1

Here is my Answer for the above question

1. Difference between accounting treatment of cost for a service company and manufacturing company

Service providers typically have low overhead costs as a result of keeping little if any inventory and having a relatively small number of employees on staff. This results in a larger percentage of revenue converting to profit in comparison to other business types, though depending on the service, the total amount of revenue may be low. Income statements generated by a service provider focus on the amount of income brought in and the types of expenses that the business encounters. Expenses that are common to other types of businesses may be left off of the income statement if the service does not require them.

Manufacturing companies typically have higher amounts of revenue than other business types due to the products produced being sold to retailers, other manufacturers, and directly to consumers. Manufacturing equipment, raw materials and the number of employees required to run a manufacturing company increase the amount paid to generate this revenue, however, resulting in a smaller amount of profit in comparison to business income. Income statements for manufacturing companies are typically more robust than those for other industries since manufacturers encounter a wider range of expenses than those companies that do not require extensive equipment, maintenance, shipping services or manpower.

2.How does the flow of costs & its accounting differ or are similar in these two sectors? What implications does this have on changes in equity?

Flow of costs refers to the manner or path in which costs move through a firm. Typically, the flow of costs is relevant with manufacturing companies whereby accountants must quantify what costs are in raw materials, work in process, finished goods inventory, and cost of goods sold.

Cost of Goods Sold, cost of sales, cost of revenue, or cost of services are referred to all the direct costs associated with services rendered to the customer for the business provides companies.

It includes all the direct costs involved in running or performing services. The typical expenses included in the category of direct costs are the cost of material, cost of labor or cost of salaries in a service industry, and all other costs which can be linked directly to the manufacturing of products or rendering of services.

However, materials are usually not significant compared to direct labor costs but we still need to include all of those materials that used to the cost of services.

Other costs that do not directly contribute to rendering service should not include in the cost of services when presenting in the income statement.