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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