Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 267

Direct Labor Factory

Overhead

COCOA GAR

Finished

Goods

Work In

Materials Process

Income

Statement

Cost of goods sold XXX

Exhibit 2

Manufacturing Inventories

The Consumer Electronic Wars: Best Buy v. Circuit City

HOW BUSINESSES MAKE MONEY

How does Best Buycompete against Circuit City Stores,
Inc.in the intensely competitive consumer elec-
tronics market? It doesn’t just follow a “me too”
method but approaches the market by trying to
find a way to distinguish itself from Circuit City.
First, a warmer color and lighting scheme, featur-
ing light yellows, was chosen over Circuit City’s
darker color scheme. Second, it opened up bigger
stores to provide extra space for the “software” of
home electronics. Best Buy believes that more
space devoted to CD music, DVD movies, and
computer software creates customer foot traffic that eventu-

ally translates into other sales. Third, Best Buy introduced a

“do-it-yourself” strategy on the sales floor. Rather

than using commissioned salespersons, Best Buy

believes that noncommissioned sales personnel

can support floor sales. That is, it believes that

customers don’t need an expert to sell them a

product. As a result, the selling expenses as a per-

cent of revenues are reduced. Has the strategy

worked? Over the last five years, Best Buy has

grown from $15,189 million to $27,433 million

in sales, an 81% increase, while Circuit City’s

sales have decreased by 1%.

Manufacturing inventories are often disclosed in the footnotes to the financial

statements of a manufacturer. For example, Hershey Foods Corporation reported in-

ventories of $621,347,000 with the following footnote detail:

Materials $166,813,000

Work-in-process 70,440,000

Finished goods 384,094,000

Total inventories $621,347,000

In this chapter, we will illustrate inventory accounting and analysis issues from the

perspective of the merchandising business. However, many of the points apply equally

well to a manufacturer. The accounting for manufacturing inventories is covered in a

managerial accounting course.