Q17RQ - Horngren'S Financial And Managerial Accounting

Question

How does a manufacturing company calculate cost of goods sold? How is this different from a merchandising company?

Step-by-Step Solution

Answer

The cost of goods sold of manufacturing company is calculated by Beginning Finished goods inventory plus cost of goods manufactured less ending finished goods inventory and in merchandising company Beginning merchandise inventory plus purchases and freight in less ending merchandise inventory.

Step-by-Step Solution Step 1: Calculation of cost of goods sold in manufacturing company

In a manufacturing company, the activities in the finished goods inventory provides information about the COGS. Cost of goods sold is calculated with the formula which is Beginning Finished goods inventory plus cost of goods manufactured less ending finished goods inventory.

Step 2: Difference in calculation of cost of goods sold for merchandising company

For a merchandising company, cost of goods sold is calculated by using the formulae Beginning merchandise inventory plus purchases and freight in less ending merchandise inventory. In merchandising company, the activity in the merchandise inventory account provides the information for determining COGS.