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Companies are frequently classified as being service, merchandising, or manufacturing businesses. As the name implies, service organizations provide services, rather than physical products, to consumers. For example, St. Jude Children’s Hospital provides treatment programs aimed at healing patient diseases. Other common service providers include public accountants, lawyers, restaurants, dry cleaning establishments, and lawn care companies. Merchandising businesses are sometimes called retail or wholesale companies; they sell goods other companies make. The Home Depot, Inc., Costco Wholesale Corporation, and Best Buy Co., Inc., are merchandising companies. Manufacturing companies make the goods they sell to their customers. Toyota Motor Corporation, Texaco, Inc., and American Standard Companies, Inc., are manufacturing businesses. How do manufacturing companies differ from service and merchandising businesses? Do service and merchandising companies incur materials, labor, and overhead costs? Yes. For example, Ernst & Young, a large accounting firm, must pay employees (labor costs), use office supplies (material costs), and incur utilities, depreciation, and so on (overhead costs) in the process of conducting audits. The primary difference between manufacturing entities and service companies is that the products provided by service companies are consumed immediately. In contrast, products made by manufacturing companies can be held in the form of inventory until they are sold to consumers. Similarly, most labor and overhead costs incurred by merchandising companies result from providing assistance to customers. These costs are normally treated as general, selling, and administrative expenses rather than accumulated in inventory accounts. Indeed, merchandising companies are often viewed as service companies rather than considered a separate business category. The important point to remember is that all business managers are expected to control costs, improve quality, and increase productivity. Like managers of manufacturing companies, managers of service and merchandising businesses can benefit from the analysis of the cost of satisfying their customers. For example, Wendy’s, a service company, can benefit from knowing how much a hamburger costs in the same manner that Bayer Corporation, a manufacturing company, benefits from knowing the cost of a bottle of aspirin.
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