Final answer:
The primary difference in cost classification between manufacturing and merchandising firms lies in the detailed categorization of costs (direct materials, direct labor, and manufacturing overhead) necessary for manufacturing, compared to the broader category of COGS for merchandising firms.
Step-by-step explanation:
The primary difference between cost classification for a manufacturing firm versus a merchandising firm is that manufacturing firms typically have three categories of costs: direct materials, direct labor, and manufacturing overhead. In contrast, merchandising firms primarily deal with the cost of goods sold (COGS), which does not break down into these specific categories. This distinction is because manufacturing involves complex production processes, requiring a detailed breakdown of costs for the creation of products. For instance, producing cars, with its high fixed costs for the factory and equipment, differs greatly from software production, where fixed costs might be lower but spending on research and development could be higher.Each type of firm faces different production decisions and cost structures in the short and long run. While fixed costs like machinery and equipment play a major role in manufacturing, they may be minimal for service-oriented or low-capital firms, such as those providing seasonal services like leaf-raking or snow-shoveling. Additionally, manufacturing firms may experience a sharp increase in marginal costs when diminishing marginal returns set in due to factors such as overworked equipment without adequate maintenance.