Suggest Solution Hint For Q1 Q2

Hint for Q1 (b)) Primary Difference The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference. Cost of Goods Sold When you review a service income statement while simultaneously viewing a merchandising income statement, the first difference you'll notice is that the latter carries an account called "cost of goods sold," while the former does not. Service-based businesses don't carry inventory and therefore don't use this account. For a merchandising company, cost of goods sold is an expense account that refers to the cost of purchasing the inventory and shipping it to the appropriate locations for selling to customers. Calculate cost of goods sold To calculate cost of goods sold in a merchandising company, calculate the beginning inventory and purchases throughout the year, then subtract the ending inventory. The beginning inventory is the amount that's present on the previous year's income statement, while ending inventory is the amount available for sale as of the date of the current year's income statement. Purchases include any shipping costs that you incur from the manufacturer or distributor. Cost of goods sold is usually one of the greatest expenses that a merchandising company incurs and one of the most important accounts on the income statement. Manufacturing Income Statement The income statement from a manufacturing company closely resembles that of the merchandising company, however there are a few added expenses. Cost of goods sold for a manufacturing company is much more complex as the company must take into account the cost of raw materials, labor and overhead that creates the finished goods. Some companies choose to present all of this information on their income statements, while others only present it as a final total for cost of goods sold.

Businesses can be classified as service, merchandising, or manufacturing companies. The three categories of businesses differ in what they offer to the customer. A service company offers its time, skills, and knowledge for a fee. All of a services company’s operating expenses are period costs, which means the expenses are recorded in the period incurred. Merchandisers buy products from suppliers and then resell them to customers. Merchandisers keep an inventory of products. Inventoriable product costs are referred to as product costs in this textbook. A manufacturer produces goods by converting raw materials into a finished product. Manufacturing companies use labor, equipment, supplies, and facilities to convert raw materials into finished products. Manufacturing companies track costs on three kinds of inventory: Raw Materials Inventory (RM), Workin-Process Inventory (WIP), and Finished Goods Inventory (FG). Raw Materials Inventory is materials used to manufacture a product. Work-in-Process Inventory consists of goods that have been started in the manufacturing process but are not yet complete. Finished Goods Inventory represents completed goods that have not yet been sold. The income statements and balance sheets for service, merchandising, and manufacturing companies differ slightly. Service companies do not report inventory. Merchandising companies report one type of inventory, Merchandise Inventory. Manufacturing companies report Raw Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory. Knowing the unit cost per service helps managers decide on the prices to charge for each service provided. Service companies do not have product costs, so operating expenses are considered in calculating the cost per service.

Merchandising companies need to know which products are most profitable, and this information helps managers establish selling prices. The unit cost per item is found by dividing the total cost of goods sold by the total number of items sold.

Hint Q2 (a) The difference between marginal costing and absorption costing Marginal costing applies only those costs to inventory that were incurred when each individual unit was produced, while absorption costing applies all production costs to all units produced. This results in the following differences between the two methods: ●

Cost application. Only the variable cost is applied to inventory under marginal costing, while fixed overhead costs are also applied under absorption costing.

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Profitability. The profitability of each individual sale will appear to be higher under marginal costing, while profitability will appear to be lower under absorption costing.

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Measurement. The measurement of profits under marginal costing uses the contribution margin (which excludes applied overhead), while the gross margin (which includes applied overhead) is used under absorption costing. Overhead costs are charged to expense in the period under marginal costing, whereas they are applied to products under the absorption costing method (which may defer expense recognition to a later period). An additional difference is that absorption costing is required by the applicable accounting frameworks for financial reporting purposes, so that factory overhead will be included in the inventory asset. Marginal costing is not allowed for financial reporting purposes, so its use is restricted to internal management reports.