Budgeting in merchandising companiesBudget preparation for merchandising companies and service companies is similar to budgeting for manufacturing companies. A service or merchandising company will not have a production budget or direct material budget and may not have a direct labor or overhead budget. The largest difference is since we do not have a production or materials purchase budget, we still need to know how much inventory we need to buy for a merchandiser. The merchandise purchases budget is similar to the production budget. The purchases budget can be done in units or in total dollars. Typically, the purchases budget is done in dollars and will use a cost of goods sold percentage to determine the cost of inventory sales. Remember, cost of goods sold is literally the cost of the inventory we are now selling and should be less than what we can sell it. This section discusses budgeting in merchandising companies. Show
Throughout this chapter, we have focused on budgeting in a manufacturing company. Suppose managers in a retail merchandising business, such as a dress shop or a furniture store, prepare a budget. In this case, the company prepares a purchases budget instead of a production budget. To compute the purchases for each quarter, management must estimate the
cost of the goods to be sold during the quarter and the inventory required at the end of the quarter.
Strobel's merchandise inventory budget would look like:
Important items to now:
Strobel can now use the information in its purchases budget to prepare the cost of goods sold section of the budgeted income statement, to prepare cash disbursements schedules, and to prepare the inventory and accounts payable amounts in the financial budget. Licenses and AttributionsAll rights reserved content
What is the difference between a merchandising company and a manufacturing company?A merchandiser purchases goods that are ready for sale from wholesalers or other sellers. They up the price of the merchandise and sell to customers. In contrast, manufacturers purchase materials and construct a product to sell to customers.
How does the budget process for the service company differ from a manufacturing company?Service companies do not have production or merchandise purchases budgets. Instead, service organizations focus on projected sales and labor costs. Not-for-profit organizations also use budgets for planning and control purposes. The format depends on the service being provided.
How does a merchandise purchases budget differ from a production budget?A merchandiser uses a merchandise purchases budget instead of a production budget. A merchandiser does not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead). The merchandise purchases budget shows the estimated cost of goods to be purchased to meet expected sales.
What is the main difference between manufacturing and merchandising companies financial statement?Unlike merchandising firms, manufacturing firms must calculate their cost of goods sold based on how much they manufacture and how much it costs them to manufacture those goods. This requires manufacturing firms to prepare an additional statement before they can prepare their income statement.
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