DIFFERENCE BETWEEN

MERCHANDISING AND
MANUFACTURING

Manufacturing companies take raw materials and transform them into

something else desired by the end consumer.

Merchandising involves buying and selling

* The main difference of the two is the way they acquire inventory for resale
MANUFACTURING BASICS
 MANUFACTURING BASICS
ELEMENTS OF MANUFACTURING COST
• DIRECT MATERIALS - their cost can be conveniently and economically
traceable to the product.

• DIRECT LABOR- compensation of worker who physically convert raw

materials into finished goods

• MANUFACTURING OVERHEAD- indirect materials, indirect labors, and

all indirect cost
 PRIME AND CONVERSION COST
• PRIME COST = DIRECT MATERIALS + DIRECT LABOR
- primary sources of cost

• CONVERSION COST= DIRECT LABOR + M. `OVERHEAD

- cost that need to convert raw materials into finish goods
INVENTORY ACCOUNTS
I. Raw Materials Inventory – This account shows the raw
materials available for use in the manufacturing process.
II. Work in Process Inventory – reflects the cost of raw
materials, direct labor, and manufacturing overhead of
goods on which manufacturing has begun but has not been
completed at the end of the fiscal period.
III. Finished Goods Inventory – reflects the costs of goods that
have been completed and are ready for sale.
INVENTORY SYSTEMS

• PERPETUAL INVENTORY SYSTEM

Perpetual Inventory System is a method of recording materials in stores ledger and
bin card after every receipt and issue. It provides and facilitates regular checking.
Effective control of materials is possible when there is continuous stock taking
system along with perpetual inventory system in operation.

Under this system, purchases of raw material is directly debited to Raw Materials
Inventory account.
THE FLOW OF MANUFACTURING COSTS
Below are pro-forma journal entries under PERPETUAL INVENTORY SYSTEM

a) Purchase of Raw Materials

Raw Materials Inventory (invoice + freight) Pxxx
Accounts Payable/ Cash Pxxx

b) Issuance of Raw Materials

Work in Process Pxxx

Manufacturing Overhead xxx
Raw Materials Pxxx

c) Return of Excess Materials to Storeroom

Raw Materials Pxxx
Work in Process Pxxx
Manufacturing Overhead xxx
d) Factory Labor Incurred
 
Factory Payroll (gross) Pxxx
Accrued wages payable/cash Pxxx
Withholding Tax payable xxx
SSS Premium Payable xxx
Philhealth Payable xxx

e) Distribution of Factory Labor

 
Work in Process Pxxx
Manufacturing Overhead xxx
Factory Payroll Pxxx

f) Manufacturing Overhead Incurred

Manufacturing Overhead (total) Pxxx

Accumulated Depreciation Pxxx
Prepaid Insurance xxx
Cash xxx
Accounts Payable xxx
g) Actual Factory Overhead Charged to the Job

Working Process Pxxx

Manufacturing Overhead Pxxx
 
f) Completion of the Job

Finished Goods Pxxx

Working Process Pxxx

g) Sale of the Completed Job

Accounts Receivable/ Cash Pxxx
Sales Pxxx
 
Cost of Goods Sold Pxxx
Finished Goods Pxxx
INVENTORY SYSTEMS

A. PERIODIC INVENTORY SYSTEM

Under the periodic method, the entire book inventory is verified at a
given date by an actual count of materials on hand. This physical
inventory is usually taken near the end of the accounting period.

Under periodic inventory system, the entity maintains temporary

accounts like purchases, purchases returns and freight in.
PRO-FORMA JOURNAL ENTRIES:

a) When raw materials are purchased on account or cash 

Purchases Pxxx
Accounts Payable/ Cash Pxxx

b) When expenses are paid like freight

Freight In Pxxx
Cash Pxxx

c) When goods are returned to supplier

Accounts Payable/Cash Pxxx

Purchased Returns Pxxx

 COST ACCOUNTING

• COST ACCOUTING - is a system that records, summaries, analyzes, and

interprets the details of the cost of materials, labor, and overhead
necessary to produce and sell an article

• is our plant operating efficiently and economically?

• which of our cost are out of line, and how can they be controlled?
• are our sales price set realistically in relation to cost?
• what is the unit cost of each type of product being manufactured
COST VERSUS EXPENSES

•Cost represents any amount paid or incurred in acquiring

goods or services. This cost is represented in the Statement of
Financial Position as asset.

•Expense is any amount paid or incurred in the operation of a business.

These expenses are necessary to generate revenue. They are recognized
proportionately in the period they are incurred to properly match the
revenue generated for the period.
 JOB ORDER AND PROCESS COST
SYSTEMS
JOB ORDER COST SYSTEM PROCESS COSTING
1. it collects all manufacturing cost 1. manufacturing cost are grouped
and assigns them to specific or by department
batches of product

2. it measures cost for each 2. it emphasizes a weekly or

completed job, rather than for set monthly time period
of time period
3. uses several WIP- one for each
3. it uses one WIP department
 WORK FLOW
•.