LU1.2 Types of Companies

7/29/2019 LU1.2 Types of Companies

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LEARNING CURVE

This chapter will enable you to:

Identify the different types of companies.

Explain the difference among the service

company, merchandising company and themanufacturing company.

Classify costs for a service company.

Classify cost for a merchandizing company.

Classify cost for a manufacturing company.


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TYPES OF COMPANIES

There are 03 Main types ofcompanies.

Service Company

Merchandising Company

Manufacturing Company


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SERVICE COMPANY

Introduction: Service companies provide and sell

services to customer.

Service companies provide health care,communication, banking, and otherimportant benefits to society. Forexamples firms such as FedEx, Goggle,and Citibank do not sell products; theysell services. Lately, many developedeconomies shifted their focus frommanufacturing to service, and nowservices firms employ more than 50%of the work force.


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Service Companies, such as TENAGA (energy supply), Telekom(telephone service), DIGI and CELCOM (cell phone service),Medical Clinic (medical services), Advocates ( legal services).

Services companies seek to provide services with the followingcharacteristics.

* High quality* Reasonable price* Timely delivery

Financial accounting focuses on financial statements for servicecompanies. Services companies have the simplest accounting,since they carry no inventories of product for sale.

All of their costs are period costs, those costs that are incurredand expensed in the same accounting period.


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Income Statement of Service

CompanyCellPhone Bhd Income Statement

As at 31 Dec 2010

Revenue:

Service Revenue 7600

Expenses:

Salary expense 1800

Rent expense 1000

Utilities expense 400

Depreciation expenses furniture 300

Depreciation building 200

Interest expense 100Supplies expense 100

Total Expense 3,900

Net Income 3,700

Note: The above firm has no inventory and so theincome statement has no Cost of Goods Sold .


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MERCHANDISING COMPANIES

Merchandising companies resellthe products they buy fromsuppliers.

Merchandising companies suchas Everrise, Boulevard buyconsumable products to be soldto consumers.

Merchandisers keep inventory ofproducts, and managers areaccountable for the purchasing,

storage, and sale of the


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Merchandising companies

Merchandiser income statement reportthe Cost of Goods Sold as the majorexpense.

Merchandiser are to reflect theinventory product cost, because the

products are held in inventory untilsold.

Merchandising companies include in itsinventory product cost the cost to

purchase the goods , custom duty andfreight in.

THE COST OF GOODS SOLD = Opening

stock + Purchases + Freight In Ending Stock.


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Boulevard Berhad Income Statement as at 31 December 2010

RM RMSales 169,300

Less: Sales Return (2000)Less: Trade Discount (1400) (3400)

Net sales Revenue 165,900

Cost of Goods Sold

Opening Stock 0Purchases and freight In 131,000Closing Stock (40,200)

Cost of Goods Sold (90,800)Gross Profit 75,100Operating expense

Wage expense 10,200Rent expense 8,400Insurance expense 1,000Depreciation expense 600supplies expense 500

Total operating expenses (20700)Interest Expense (1,300)

NET INCOME 53,100

Merchandising Company Income

Statement


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MANUFACTURING COMPANY

Manufacturing companies make their own product forsales ortransfer to other department at transfer pricing price.

It uses labor, equipment, and facilities to convert rawmaterials into

finished products. Managers in manufacturing companiesmust use

these resources to create a product that customers want.

It differs from service and merchandising firms, as itinvolves

tracking costs on 3 kinds of inventory:

(1)Raw material inventory it require raw materials inmaking product.

(2)Work in progress goods not fully complete as finished

product.(3) Finished goods goods completed but are NOT sold.


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Manufacturing Companies

Types of Cost

Direct materials becomes a physical part of the finishedproduct. The cost can be traced directly to the finishedproduct.

Direct Labor the labor of employees who convertmaterials into the companys products. The cost can betraced directly to the finished product.

Manufacturing overhead - includes all manufacturing costs other than direct

materials and direct labor.- includes activities which incur costs such as indirectmaterials, indirect labor, repair and maintenance,utilities, rent, insurance, property taxes, depreciation onmanufacturing plants, buildings and equipment.- manufacturing overhead is also called factory overheador indirect manufacturing cost.

S h d l f t f d


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Schedule of cost of goods

manufactured at 31 Dec 2010Cost of Goods manufactured.

Opening Direct materials 70,000Purchase of D/materials (include freight) 350,000Closing Direct materials (65,000)Direct materials used 355,000

Direct labor 169,000

Manufacturing overheads:Indirect materials 17,000Indirect labor 28,000Depreciation (plant/equipment)10,000

Plant utilities, insurance, tax 18,000 (73,000)

Total mfg cost incurred in the year 597,000Add: Opening work in progress 80,000Less: Ending work in progress ( 27,000)

Cost of goods manufactured c/f 650,000


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Manufacturing Company Income Statement at 31 Dec 2010

Sales Revenue 1200,000Less : Sales return (120,000)

Sales discount (80,000) (200,000)1000,000

Cost of goods sold:Opening Finished goods 0Cost of goods manufactured 650,000Ending Finished goods ( 50,000)

Cost of goods sold (600,000)Gross Profit 400,000

Operating expenses:Wage 120,000Rent 100,000Insurance 10,000Depreciation 6,000Supplies expense 5,000 (241,000)

Operating Income 159,000

Interest Expense ( 7,500)Net Income 151,500

Documents

LU1.2 Types of Companies