Classification of Inventory:
Learning objectives of this article:
-
Identify major classifications of inventory.
Merchandising Companies:
Inventories are assets items for sale in the
ordinary course of business or goods that will be
used or consumed in the production of goods to be
sold. The investment in inventories is frequently
the largest current asset of merchandising and
manufacturing businesses. Therefore description and
measurement of inventory require careful attention.
A
merchandising company ordinarily purchases its
merchandise in a form ready for sale. It reports the
cost assigned to unsold units left on hand as
merchandise inventory. Only one inventory
account, merchandise inventory, appears in the
financial statements. Example of such a
merchandising company is Wal-Mart.
Manufacturing Companies:
Manufacturing companies produce goods which may be
sold to merchandising companies as well as directly
to customers. Manufacturing companies normally have
three inventory accounts. These are:
-
Raw materials
-
Work
in process
-
Finished goods
These
three inventory accounts are briefly explained below:
Raw Materials:
The cost
assigned to goods and materials on hand but not yet
placed into production is reported as raw materials
inventory. Examples include the wood to make a base
ball bat and the steel to make a car. These materials
can be traced directly to the end product.
Work in Process:
Some units
are not completely processed at any point in a
continuous process. The cost of the raw material on
which production has been started but not completed,
plus the direct labor cost applied specifically to this
material and a ratable share of manufacturing overhead
costs, constitute the work in process inventory.
Finished Goods Inventory:
The costs
identified with the completed but unsold units on hand
at the end of the fiscal period are reported as
finished goods inventory.
|
Comparison of current assets presentation for
merchandising and manufacturing companies
|
Merchandising Company |
|
Manufacturing Company |
Balance
Sheet
January 31, 2011 |
Balance
Sheet
January 31, 2011 |
| |
Current assets (in millions) |
|
| |
|
Cash and cash equivalents |
$2,161 |
| |
|
Receivables |
2,000 |
| |
|
Inventories at LIFO cost |
22,614 |
| |
|
Prepaid expenses and other |
1,471 |
| |
|
|
|
| |
|
|
$28,246 |
| |
|
|
|
| |
|
|
|
|
| |
Current assets (in millions) |
|
| |
|
Cash and cash equivalents |
$77 |
| |
|
Short-term investments |
233 |
| |
|
Accounts and notes receivable
(net) |
109 |
| |
|
Inventories: |
|
| |
|
Finished goods |
$32 |
|
| |
|
Work in process |
23 |
|
| |
|
Raw materials |
42 |
|
| |
|
Packaging materials |
18 |
|
| |
|
|
|
|
| |
|
Total inventories |
115 |
| |
|
Prepaid expenses and other |
73 |
| |
|
|
|
| |
|
Total current assets |
$607 |
| |
|
|
|
|
|
Manufacturing companies
also use machine oils, nails, cleaning materials etc.
These items are used in production but are not the
primary materials being processed. Manufacturing
companies that use these items in their manufacturing
process, might include a manufacturing or factory
supplies inventory account.
Flow
of Costs Through Merchandising Company
|
Merchandise Inventory |
|
Cost of
goods purchased |
Cost of
goods purchased |
Flow
of Costs Through Manufacturing Company
|
Raw
Materials |
|
Actual
materials cost |
Cost of
goods purchased |
|
Labor |
|
Actual
labor cost |
Labor
applied |
|
Overhead |
|
Actual
overhead cost |
Overhead
applied |
|
Work in
Process |
| |
Cost of
goods manufactured |
|
Finished
Goods |
| |
Cost of
goods sold |
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