Any professional accountant can help me answer the question

1.Describe how the inventory accounts of a manufacturing company differ from the inventory of a

merchandising company?

2.Name three approaches the break-even analysis.Briefly explain how each approach works?


2 Answers

  • ?
    Lv 6
    1 decade ago
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    There are three different inventory accounts to account for when dealing with manufacturing activities. They are Raw Materials, Work-in-Process (WIP) and Finished Goods.


    The Raw Materials account is treated in the same way as the retail inventory accounts. The only difference is that cost of goods sold (COGS) is now the Cost of Raw Materials Used (CORMU) and should be debited to the WIP account. The calculation is as follows:

    Beginning Inventory


    Returns and Allowances




    Cost of Raw

    Materials Available

    for Use (CORMAFU)

    Cost of Raw Materials

    Used (CORMU)

    Ending Inventory

    Valuation of Ending Inventory: Use one of the four Cost Methods

    (Specific Identification, Weighted Average Cost, FIFO or LIFO).


    The Work-in-Process (WIP) account includes all product costs, which fall under one of three categories (Raw Materials, Direct Labor or Factory Overhead). After the ending balance in WIP is calculated, the cost of finished goods manufactured (COFGM) can be calculated as follows:

    Beginning Inventory

    Processing Costs

    • Direct labor

    • Factory overhead

    (e.g., factory rent, equip. costs, prod’n supplies, indirect labor, etc.)

    Cost of Raw Materials

    Used (CORMU)

    Cost of Work-in-process (COWIP)

    Cost of finished goods manufactured (COFGM)

    Ending Inventory


    • One of the most difficult tasks involved in accounting for manufacturing activities is to value the ending balance in WIP.

    • The formula to value the ending balance in WIP is always PRM + pDL + pFOH.

    • It is difficult to assign all units a common value since they may be at different stages of completion.

    • Instead, managers use an estimate where they break down the partially completed goods into three components:

    - Raw materials

    - Direct labor

    - Factory overhead


    After the COFGM has been transferred to the Finished Goods account, the ending balance in Finished Goods can be calculated as follows:

    Beginning Inventory

    Cost of Finished

    Goods Manufactured

    Cost of Goods

    Available for Sale


    Cost of Goods Sold


    Ending Inventory

    (Weighted-average cost)

    Cost of Goods Sold Expense

    Cost of Goods Sold

    Inventory account of a merchandising company: similar to raw material in manufacturing account, and you can simply state it as Stock.

    2. Breakeven analysis

    There are four break-even points that have been used in evaluating the profitability of operations.

    Shut-Down Point--This is the time at which the revenues are equal to the sum of the production costs, such as material, labor and maintenance. For production times greater than the shutdown point, it is more profitable to shutdown than to operate.

    Break-even at Cost--This point is the production time at which revenues are equal to the sum of the production and overhead costs or the total costs. At production times between the shutdown and break-even points, the product will lose money but recover some of the overhead costs. This may occur when business is poor and the foundry operates at a loss with the expectation that business will get better.

    Break even at Required Return--This is the production time at which not only are the total costs (production and overhead) recovered, but also a desired level of return is recovered.

    Break even at Required Return after Taxes--This is the production time at which the total costs, taxes and required level of return are recovered.

  • 1 decade ago

    1. Manufacturying company inventory account has raw material, WIP and finished goods

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