Hello, students. Welcome back. In this video, we'll be going over chapter 5: Process Costing. Let's review the difference between process costing and job order costing. Process costing is used by companies that produce large volumes of similar product so costs related to this product are accumulated for a certain period compared to the job order costing system. In process costing system, products cannot be distinguished from each other like ice cream, candy, cereal and even paint. On the other hand, the products in a job order costing system are manufactured in smaller quantities and may include custom jobs so the cost could be traced for a specific product or job. If a general contractor has two different kitchen remodels for two different clients, the contractor has two jobs and would track costs for those jobs separately. The difference between process costing and job order costing is how the costs are assigned to the product. In process costing, the manufacturing costs also known as product cost are assigned to each department rather than to each product or job. Let's look at the process costing cost flow. Like the cost flow from job order costing system, manufacturing costs such as direct materials, direct labor, and manufacturing overhead are needed to manufacture a product. These costs are assigned to each department instead of each job or each product. When these costs are assigned, they're considered work in process by each department. Units produced from one department can move to the next department until they are completed. When units are completed, they get transferred to finished goods inventory from the last department. When the units are sold, they become cost of goods sold. Now that we have reviewed process costing system, we'll practice some journal entries together. Manufacturing costs example one. July 31st, raw materials of forty four thousand two hundred dollars were requisitioned to the factory for production. An analysis of the materials requisition slips indicated that 24000 direct materials were placed into assembly department and 20200 direct materials were placed into finishing department. Journalize. Date of the transaction will be 7 31. Raw materials were requisitioned to the factory for production. That means raw materials are being placed into the production. Now they are being used by each department, what goes into the production are considered work in process inventory. So we'll have work in process inventory by assembly department and work in process inventory by finishing department. So we'll be debiting work in process inventory assembly department for twenty four thousand dollars and twenty thousand two hundred dollars of direct materials were placed into finishing department. So we'll be debiting work in process inventory by finishing department for twenty thousand two hundred dollars. Twenty four thousand dollars plus twenty thousand two hundred dollars would be still forty four thousand two hundred dollars, which we will be crediting to raw materials inventory because that's what's being placed into each department for production. For explanation, we'll say to record assignment of raw materials. Manufacturing costs example 2. July 31st, assigned 31000 in factory labor to assembly department and 5300 in factory labor to finishing department. Journalize. This time, factory labor is what is being used by each department so it will still become work in process inventory by each department. Date of the journal entry will be 7 31. We will be debiting work in process inventory by assembly department for thirty one thousand dollars and we'll also be debiting working process inventory but this time by finishing department for five thousand three hundred dollars. Thirty one thousand plus five thousand three hundred dollars is thirty six thousand three hundred dollars on the credit side and we have to credit it because this total amount is coming out of our factory labor. That is what is being assigned to the production. We will say to record assignment of factory labor as our explanation. Manufacturing costs example 3. July 31st, prepare journal entries for when manufacturing overhead is applied to the product based on machine hours used in each department. First one is assembly department, 200 machine hours at 30 dollars per machine hour 200 times 30 dollars per hour is six thousand dollars. Finishing department, 300 machine hours at 15 dollars per machine hour. So that is 300 machine hours times 15 dollars per hour which is four thousand five hundred dollars. Six thousand dollars of manufacturing overhead is what is being assigned to assembly department and 4500 of that is what is being used by finishing department. So the date of the journal entry will be 7 31. We're debiting work in process inventory by assembly department for six thousand dollars and we're also debiting work in process inventory by finishing department for four thousand five hundred dollars and they're coming out of manufacturing overhead. So we need to credit manufacturing overhead for six thousand dollars plus four thousand five hundred dollars which is ten thousand five hundred dollars. This is to record assignment of manufacturing overhead. Manufacturing costs example 4-1. July 1st, Rebel Corporation purchased twenty thousand five hundred dollars of raw materials on account and the company incurs forty five thousand seven hundred dollars of factory labor costs on July 31st. Of these costs, fifteen thousand dollars of raw materials and twenty five thousand seven hundred dollars factory labor are allocated to assembly department. The rest costs are allocated to finishing department. Manufacturing overhead is assigned to departments on the basis of 130 percent of labor costs. Journalize the transactions. So first, we're going to record what is highlighted in yellow. The very first transaction of purchasing raw materials and incurring cost for factory labor. So date of the journal entry will be seven one. Company's purchasing twenty thousand five hundred dollars of raw materials so we're gaining raw materials which is an inventory and will increase with debit side. So we need to debit raw materials inventory for twenty thousand five hundred dollars. How did we purchase these materials? On account. Meaning no cash was exchanged but we're going to owe the supplier and pay them later. So we need to use an account called accounts payable. We need to credit accounts payable for twenty thousand five hundred dollars. This is to record purchase of materials on account and the company incurs 45700 of factory labor costs on July 31st. So now we will have 7 31 as our date. We have used our employees' labor in our business. So we'll need to debit factory labor for 45700 and credit what we owe to our employees which will be factory wages payable. So we're crediting factory wages payable until we pay them and that is for forty five thousand seven hundred dollars. This is to record factory labor. Continuing with our manufacturing costs example 4. This time. we're trying to record what is assigned to the production. So first, we're going to look at what is being allocated from raw materials. We have twenty thousand five hundred dollars of raw materials. Of those, fifteen thousand dollars of raw materials are allocated to assembly department. Twenty thousand five hundred dollars minus fifteen thousand dollars is five thousand five hundred dollars. So the rest costs are allocated to finishing department. So five thousand five hundred dollars of materials are going to be used by finishing department. So date will still be 7 31. We need to debit work in process inventory by assembly department for 15000 dollars. We also need to debit the materials that are used by finishing department. So we are debiting work in process inventory by finishing department for 5500. 15000 plus 5500 is still going to be twenty thousand five hundred dollars. We need to credit twenty thousand five hundred dollars to raw materials inventory account. This is to record materials assigned. On July 31st. Now we still have to record the factory labor that is assigned to each department. Forty five thousand seven hundred dollars of factory labor is allocated to assembly department for twenty five thousand seven hundred dollars. Forty five thousand seven hundred dollars minus twenty five thousand seven hundred dollars is twenty thousand dollars allocated to finishing department. So we need to debit work in process inventory for assembly department for twenty five thousand seven hundred dollars and the rest of the factory labor which was twenty thousand dollars will be debited to work in process inventory for finishing department. and they're both coming out of factory labor. That is what is being assigned so we need to credit factory labor for twenty five thousand seven hundred plus twenty thousand dollars which is forty five thousand seven hundred dollars. This is to record factory labor assigned. On July 31st, we still have to record what portion of the manufacturing overhead is allocated to the production in each department. So the date of the journal entry will be 7 31. Manufacturing overhead is based on 130 percent of labor cost. So twenty five thousand seven hundred dollars of labor was attributed to assembly department. That means manufacturing overhead will be based on twenty five thousand seven hundred dollars times one hundred thirty percent and that is being allocated to assembly department. Twenty five thousand seven hundred times one hundred thirty percent is thirty three thousand four hundred ten dollars. And for finishing department, it'll be based on twenty thousand dollars of factory labor times 130 percent which is 26000. So we'll be debiting work in process inventory by assembly department for thirty three thousand four hundred ten dollars and will be also debiting work in process inventory by finishing department for twenty six thousand. Thirty three thousand four hundred ten dollars plus twenty six thousand dollars is fifty nine thousand four hundred ten dollars which should be credited to manufacturing overhead. This is to record manufacturing overhead assigned. Manufacturing costs example 5. August 31st, units costing 13300 were completed in the assembly department and were transferred to the finishing department. Journalize. So the units are moving from one department to the next department. So the date of the journal entry is 8 31. Which department is going to receive these units? Finishing department. So you will have inventory in finishing department. Therefore, we need to debit work in process inventory by finishing department for thirteen thousand three hundred dollars and where is this coming from? From assembly department. So the assembly department will no longer have these units. We need to credit work in process inventory by assembly department for thirteen thousand three hundred dollars. This is to record transfer of units. Manufacturing costs example 6. August 31st, units costing 35700 were completed in the finishing department and were transferred to finished goods. Journalize. Now you're going to have the final product you can sell to your customers. So you should have inventory in finished goods. On August 31st, we should be debiting finished goods inventory for 35700 and where did they come from? They came from finishing department. So we need to credit work in process inventory by finishing department for thirty five thousand seven hundred dollars and this is to record transfer of units to finished goods inventory. Manufacturing costs example 7. September third, finished goods costing fifteen thousand two hundred fifty dollars were sold on account for forty five thousand dollars. Journalize. When it comes to the sales transaction, there should be two journal entries that are getting recorded, one to record the sale and second transaction to record cost of the sale. First, we're going to start with the sale. Date will be September 3rd. So 9 3. What we're selling is being charged on account. So that means customer is going to owe us money for the products that they're receiving and they're going to make the payment later. In that case, we use an account called accounts receivable so we need to debit accounts receivable for forty five thousand dollars. If you received cash, you will be debiting cash instead of accounts receivable because at that time no money will be due to you. You have already received a payment. But in our case, it's done on account so the customer will still owe us forty five thousand dollars. Why are we going to be receiving forty five thousand dollars? Because we just made sale. As soon as the sale is performed, we get to record that as revenue, sales revenue because we have earned it. We'll be crediting sales revenue for 45000. This is to record sale or sale on account. The same day on September 3rd, we need to record what is being sold and how much it costs us. When we're selling finished goods inventory, it becomes our expense which is cost of goods sold. So we need to debit cost of goods sold for fifteen thousand two hundred fifty dollars and this represents the inventory that is leaving company. And what kind of inventory is leaving company? Finished goods inventory. So we need to credit finished goods inventory for fifteen thousand two hundred fifty dollars. This is to record cost of the sale. On income statement, you will see sales revenue and cost of goods sold. So you have sales revenue which are how you were able to generate income for your company, 45000. We still have to know how much it's costing you. It should not cost you more than 45000 because in that case you're not going to have any profit left over. You might even have net loss. Sales revenue minus cost of goods sold of fifteen thousand two hundred fifty dollars is twenty nine thousand seven hundred fifty dollars gross profit. So you're going to have twenty nine thousand seven hundred fifty dollars left to cover the rest of the expenses. In the process costing system, costs are accumulated to each department. When producing one unit, how is the cost determined? Think about producing ice cream in batches. Perhaps you have manufacturing costs being allocated to mixing department or even to packaging department. The costs in each department are allocated to the number of units produced. But because of the timing when accounting period ends, it is not always easy to determine the number of units produced. Accounting period may end at the end of the month but this doesn't mean production is going to stop at the exact same time. You might have 500 units that are fully completed. In the same accounting period, there might be 100 units that are only 50 percent complete. 100 units times 50 percent is 50 units. These units are considered equivalent units which are the number of units that would have been produced if units were produced in its entirety. Not all units worked on in the department are fully complete. The number of equivalent units is not same as number of actual units. If we look at the first example for equivalent units, there are eight glasses of water that is only 50 percent full. When you combine them, you will have four full glasses of water. So these eight glasses of water filled in half are equivalent to four full glasses of water. Another example of equivalent units. There are four pieces of wooden tables that are only 50 percent complete. So they are partially complete. Each piece is only completed halfway through but when combined, these four partially completed units are equivalent to two wooden tables. Equivalent units of productions measure the work done during the period, expressed in fully completed units. So they can be made up of partially completed units. Equivalent units can be calculated as units completed and transferred out plus units of ending work in process. That is it for the lesson. Thank you for watching. Bye.