Describe how costs flow from the initial purchase of inventory related items through to Cost of...

Describe how costs flow from the initial purchase of inventory related items through to Cost of Goods Sold for:
1. A merchandising company
1. A manufacturer

Expert Solution

a. A Merchandise company

The initial purchase of inventory is recorded in a Merchandise Inventory account as part of accounting. As and when the sales of merchandise inventory occur the cost equivalent value of merchandise inventory is transferred to Cost of goods sold account and credit is given to Merchandise inventory. A Merchandise company is not engaged in manufacturing activity hence there is no need to account for raw material inventory and work in process inventory

b. A manufacturer

The purchase of raw material is accounted in Raw material inventory account. Raw materials are issued to Work in process account based on material requisition slip. Work in process account maintains the details of cost incurred on manufacturing during the period. It has opening balance, cost incurred during the period- direct material, direct labor and manufacturing overhead. At the end of the period the cost of completed finished goods is credited to work in process inventory. As and when the sales occur the finished goods inventory account is credited by debiting cost of goods sold. Thus a manufacturer has 3 types of inventories Raw material inventory, work in process inventory and finished goods inventory.

ekkarill92 answered 1 year ago

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