 In this discussion we will discuss the discussion question of discuss how to track and report the flow of overhead costs in a process cost system. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. So if we see a discussion question or an essay question like this we're going to pull out the key points and then expand on those key points and as we do so we'll pick up some points just by defining hopefully some of these items in something like an essay question. So discuss how to track and report the flow of overhead. So that's going to be one of our key point costs in a process cost system. So first we want to consider a process cost system when would we use a process cost system and then we'll talk about what overhead is hopefully pick up some points in that and then we can talk about the flow of overhead which is probably the most complex part of the question. So the process cost system is going to be one of the two major systems typically using a manufacturing type of company those being a job cost system and a process cost business the manufacturing companies those that make inventory typically as opposed to a service company or a merchandising company so we're actually making the inventory here. We're focusing in on the process cost system as opposed to the job cost system typically making something that's going to be very the same in nature similar in nature all the same type of items and therefore we'll do we'll track the inventory through the system by process so that's going to be our goal we're tracking inventory items by process those inventory items typically include what we think of as raw materials and that we think of overhead and we think of labor typically so that's what's going to be included we here concentrating on the item of overhead as we consider the process we kind of have to start at raw materials because that's where things start we're converting the raw materials to the finished goods inventory that we will eventually sell so we'll have the raw materials when we start with the raw materials we transfer those to the work in process account we put those into the work in process account and we pull apply anything that we can directly apply to the process that's when we start the job as it goes into the process we apply anything we can directly to that process things like direct labor and direct materials and then we have all the indirect stuff the stuff that we cannot apply directly out and this is going to be anything that you can think of typically on the factory that we can't apply out to a particular process for whatever reason and you could think of it like if we're talking about depreciation on the factory we don't know how exactly to break it out between the the processes within them then we're going to say okay we got to put that into overhead so this is going to be the system that we'll have with the overhead it's going to be included in finished goods but we're going to have to put this information into overhead in the journal entries will typically be a debit to overhead and a credit to any of these these other items that are costs and notice a lot of these are things that we typically think of as kind of we would expense them we would think of them as expenses in a service type business when we're producing things they're going to be a type of inventory they can't go directly into the work in process but rather go into the the overhead that we will then apply out to the work in process as we go through so that's going to include again anything that basically says it's going to be on the factory so if there's depreciation on the factory we debit not depreciation expense but the factory overhead and credit the accumulated depreciation if there's utilities on the factory or something like that we debit not utilities expense but factory overhead because it's on the factory we're producing inventory with it and we credit the utilities payable or cash if we pay the utilities we might have indirect materials that are used we'll do a similar process we'll take the materials and we'll put it into the overhead and and with a debit and then we'll credit the materials account whether it be a combined materials account or direct or indirect broken out would be coming out of indirect then if we had indirect labor same kind of idea that we would have to we would have to debit not payroll expense debit not work in process because we don't know which process to put it to but we know it's part of inventory and therefore debit the factory overhead so these are just some example of items that would be in the overhead notices bucket includes a lot of different things that might we think should be included in the ending inventory but we don't want to be able we don't know how or want to go through the cost of tracking them to the specific job and or the specific process not the job or in a process the specific process and therefore we put when overhead is applied to production based on a predetermined overhead rate work in process is debited and factory overhead is credited so then we'll of course apply out the overhead and we'll use a predetermined overhead rate in order to do so at that point in time will have the overhead in the work in process account if there's any over or under applied overhead then typically what we'll do is we'll do whatever we need to do to make the over account zero because it's going to it's just an estimate and we'll usually take the other side of it to cost of goods sold so in other words if the overhead account still has something in it and we have to debit it to make it go to zero will then credit cost of goods sold and the reverse is true if we had to credit the overhead to make it go to zero will debit cost of goods sold and that's going to be an estimate because we're basically using an estimate with overhead if it's material then we may have to take that overhead and find some other system to apply out the overhead to to the work in process accounts then of course once the overhead is in finished goods along with all other costs in the finished goods so now the finished goods are going to be including the components of finished goods which include the raw material the cost of the raw material the cost of the direct labor and the cost of the overhead then we can then sell it at some point in time and that's going to move it out of the finished goods with a credit to basically inventory finished goods inventory and debit cost of goods sold the expense account and that that journal entry coincides with the journal entry at the sales journal entry which is a credit to sales or income and a debit to accounts receivable or to cash at that point