Response to Coments on DQ1 J1 and DQ2 KS - Essay Example

DQ1 I agree with you that the primary difference between the accounting of manufacturing companies and service companies is the addition of the inventory element. Service companies do not carry any inventory because their sales are based on an intangible product. The existence of inventory creates added costs for companies such as freight costs to acquire the merchandise and the cost of maintaining a warehouse to store the inventory. Companies in the retail industry have inventory of items that are ready to sell.

In a manufacturing company there are different types of inventory. The three types of inventory in a manufacturing operation are raw material, work in process inventory, and finished goods inventory (Garrison & Noreen). Inventory is a current asset, but this asset is not as liquid as other current assets. The most liquid current asset is cash. The multi-step income statement provides more details than the single step income statement. DQ2 I like your response and agree with you in your response because the way inventory is handled affects the profitability of a company.

In the auto industry the Big Three in order to compete with international competition began to outsource part of the inventory work. Instead of producing auto parts themselves the companies the companies are outsourcing by purchasing the parts from foreign distributors. Techniques such as just in time inventory enabled managers to minimize the amount of inventory companies have in their plants. Having too much inventory is bad due to the opportunity costs associated with holding the inventory.

A cost of opportunity can be defined as the alternative use that was forgone when making a decision (Varian). For example a person that decided to give up their job to become a hot dog vendor has the opportunity cost of the salary that he will stop making to sell hot dogs. Work Cited Page Garrison, R., Noreen, E. 2003. Managerial Accounting (10th ed.). Boston: McGraw Hill Irwin. Varian, H. 2003. Intermediate Microeconomics: A Modern Approach (6th ed.). New York: W.W. Norton & Company.