What is the difference between merchandise inventory and manufacturing inventory

A merchandising company resells goods that it purchases from its suppliers. A manufacturing company produces goods from raw materials, which is later sold as a finished product.

Concept #1: Merchandising Companies

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Concept #2: Manufacturing Companies

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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

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

What is the difference between merchandise and manufacturing?

A merchandising company resells goods that it purchases from its suppliers. A manufacturing company produces goods from raw materials, which is later sold as a finished product.