Multiple Choice
Which type of company is least likely to use a process costing system?
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4. Merchandising Operations
Service Company vs. Merchandising Company
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One important difference between service companies and merchandising companies is that:
A
Service companies record cost of goods sold, while merchandising companies do not.
B
Merchandising companies primarily provide intangible products, while service companies sell physical goods.
C
Service companies do not maintain inventory, while merchandising companies purchase and sell inventory.
D
Both service and merchandising companies manufacture products for sale.
Verified step by step guidance1
Understand the key difference between service companies and merchandising companies: Service companies provide intangible services and do not maintain inventory, while merchandising companies purchase and sell physical goods, maintaining inventory.
Recognize that service companies do not record cost of goods sold because they do not sell physical goods, whereas merchandising companies do record cost of goods sold as part of their operations.
Identify that merchandising companies maintain inventory accounts to track goods purchased for resale, while service companies do not have inventory accounts since they do not deal with physical goods.
Note that both service and merchandising companies differ in their primary operations: Service companies focus on providing services, while merchandising companies focus on buying and selling goods.
Understand that manufacturing products for sale is not a characteristic of either service or merchandising companies unless they are also involved in manufacturing operations, which is a separate category of business.
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