 Hello, in this lecture we're going to talk about a job cost system. At the end of this, we will be able to list accounts related to inventory in a job cost system, explain what a job report is and why it is needed, generalize transactions related to inventory in the job cost system. Alright, so first we're going to take a look at a list of accounts and break out the items that we will be working with. Then we'll go through an example to demonstrate this. We have the trial balance. Trial balance is going to have the debits that are non-bracketed. Credits have brackets. Therefore, the debits minus the credits will equal zero. That's showing us that we are in balance. No income at this time. The green accounts are assets. The orange accounts are liabilities. Equity in the light blue. Income in the dark blue. Net income is of course these accounts down here. We will be focusing in on the inventory type accounts when we are talking about the job cost system. Those accounts including raw materials that will be going into inventory, working process, the work that's in process that will be inventory once it's done being in process. At that point it will then go into finished goods because it's finished. And then we have this overhead. This is this bucket. I'm going to put it up here in the assets section because it will be an asset at the end of the day. We're going to put the 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 than 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. Miscellaneous information that can't be applied specifically to a job here and then apply it to the job based on some type of ratio or estimate. Now we then have the general ledger account. Obviously every account has a GL account listed by date. We won't list every account here. We will focus in on the accounts that will be related to inventory, raw materials going into working process, generally factory overhead, the stuff that will then go into working process as well once we allocate it out. And the finished goods will then be here. Those are the asset accounts related to inventory that we're going to focus in on. Remember working process what it's going to end up consisting of is the inventory, which is going to be romp direct materials, direct labor factory overhead. So when you sent when you think of inventory, you always want to think that if you're a manufacturing company, we're going to actually do that in the process. It's going to have directly direct materials and factory overhead. If we just bought the inventory, you can think of it the same thing is still there. What made the inventory, what's labor overhead and direct materials. That's what's in the inventory. And then we've got the job cost record. So this is going to list it out by jobs. Remember when we talk about jobs, it's all the jobs are different. So I often think about construction because construction could have very different jobs and I've worked in construction, but any job that is different in nature, we want to break out by job so that we can allocate the items to the job. So we have direct material, labor and overhead that we're going to allocate to the jobs. And you might be thinking this looks kind of like an invoice and it is kind of like the items that we would put into an invoice if we were to bill a client bill a client for say a job. Of course, we would then have to mark it up for our what we were going to get for it for our time on top of these items with our just the costs. These are just the costs to us not counting up any markup for our revenue. So if you think about this as an invoice, this is the material that could go into an invoice and then we'd have to mark it up. So if we look at our jobs, we got job 14 and then 15 down here for some reason and then 16. And if we add those three jobs up, we got the 41,000, the zero and the 42 adds up to this 83. That of course ties out to the 83 on the trial balance. That of course also ties out to the 83 in the working process. So that will always be the case. We need this to back up the working process in a similar fashion as we need like an accounts receivable subsidiary ledger to back up the accounts receivable account. Why? Because the general ledger doesn't tell us the whole story. It only breaks it out by date. We need to break it out in the case of the receivable by customer who owes us money. And we need to break it out in the case of working process by job, which jobs are making up that amount. Because when we transfer or sell those jobs, we need to know the costs related to that particular job that was sold. All right. So we're going to go through some transactions and work through these. We got purchased raw materials of 400,000 on account. So if we purchase raw materials on account, then raw materials is going to go up. So here's the raw materials accounts of debit, we're going to make go up with the debit and the accounts payable went up here with a credit. It has a credit balance that went up. Now we're going to focus in on the raw materials, of course, because that's going to be our asset accounts. So now we have the 150 goes up by 400 to the 550. That's what our raw materials is at at this point. Of course, accounts payable went up as well. We're not going to look at the GL account because that's nothing new to us. That's a normal process within our accounting. And if we look at our job cost report, nothing new happened here, because this raw materials here is not yet into any particular job. So you can think of it as just a pile on the corner hasn't yet been applied to the job. Therefore it's not in work and process. Therefore it's not going to be applied to the job until we request it to be applied to the job. So now we're going to say, okay, now the first thing that happens is we are going to take that raw material and requisition it to the particular jobs. So job 1415 and 16 requested raw materials in this fashion. So if we add those up then, it adds up to 350. So work and process here is going up by 350. And it's coming out of the raw materials. So if we look at the general ledger, we're going to say, okay, raw materials is going up by 350. I mean, I'm sorry, raw materials is going down by the 350 550,000 in it minus the 350 to 200,000. And it's going into work and process representing our jobs. So it went up from 83 by the 350,000 to 433. But this 350,000 represents all three allocations to all three jobs. It's not broken out for us in the general, the general ledger, or of course in the trial balance that ties out to the trial balance. But I don't know which job, you know, if I sold those jobs, what is it related to? Therefore, we need to allocate it to the jobs. Here's the materials. Here's job 14 with 100. It's at 114 in terms of materials, labor and then overhead adds up to total job of 141. Job 16, we're jumping down to 1680,000. Here's the 80,000. That's a total job at this point of the 80,000. And then job 15, 170,000 bringing materials up to 188, plus the labor and overhead to 12. If we add up these three jobs, 141, 80, and to 12, we get the 433. That ties out to the 433 on the general ledger. That ties out to the 433 on the trial balance, of course. All right. Next transaction, direct labor. All right. So remember, we have direct labor broken out by job. Now we're able to apply the direct labor specifically to each job. We know the jobs that happen. So the journal entry related to labor is going to be debit to work in process and a credit to cash, we're going to say. Now, when we think about labor, it's a little bit confusing because when we think about labor, we think about processing payroll or processing payroll. Well, for one, we're taking out the payroll liability and whatnot because we're simplifying this transaction. We don't want to complicate things by thinking about payroll, but this is basically a payroll transaction. We're crediting cash because people earned money and we're debiting you would normally think wages expense because that's what we've probably done in the past, some kind of expense related to wages. That's because we used it in order to generate revenue in that time period. In this case, it's not an expense. It's going to be part of the asset because we used their work to make the asset. So a lot of things that were expenses before are now part of the asset and we've got to change our way of thinking for that reason. It's part of the accrual process, but many people just start to memorize what type of transactions are expenses and wages usually just falls into that category and we don't train ourselves to think, well, that's because of the matching principle and that we use the wages to help us generate revenue. And now it's not part of the matching principle because now we're using those in order to generate the asset. So we're going to have to rethink a few things here. So we put in now this direct labor into the working process at the 218. Remember that again, we combined all these to one number 218 and that is now the ending balance in the working process is the 651, 651, but we need to know how it is by job again. So that 651 is not enough. We want to know how it is by job. So if we actually sold the job, we would know so if we allocate this out 30,002 job 14 brings it to 48 plus the materials plus the overhead brings it to 170 fun one, the 112 120 here brings it to 120 so the 80 plus the 120 total job 200,000 the 68,002 job 15 so the 188 plus the 84 and eight gives us the 280. So if we add up the three jobs the 171 the 200 the 280 we come up to the 651 which of course ties out to the working process on the trial battle which ties out to the working process on the general ledger next transaction applied factory overhead based on a predetermined overhead rate. Now we'll talk about a predetermined overhead rate at a different time minutes. This problem we're just going to give the predetermined overhead rate. Why what is the predetermined overhead rate? Well remember that factory overhead is going to have all the stuff that we're going to put into factory overhead that we could not apply directly to a job. Things like the supervisor salary, things like depreciation on the factory, things like small materials like grout or something that it would just be too costly for us to track how much of it went to a particular job. But we do want to put it into the job somehow. So you might think well we could just allocate that evenly to each job how many jobs is just just estimated out allocated evenly. But the jobs are different in nature remember. So the jobs are different sizes so we have to figure out okay how can we allocate this stuff to the jobs using some kind of relevant allocation method. And so what we do is we usually find a cost driver and oftentimes that's going to be direct labor. So why? Because direct labor jobs that have more direct labor they would then have more cost allocated to them they would be larger so you would think we would allocate more overhead. So we determined based on last year's numbers based on the ratio of direct labor compared to the overhead how much we should allocate to each job of overhead based on how much direct labor was in each job we came out to 1 to 50 percent. Now if we do the journal entry then we're going to say the job's going to get working process 109 into working process we're going to credit factory overhead. So again that 109 represents a bunch of different stuff that we're just kind of allocating in based on last year's numbers of all this kind of stuff that we just allocated out that we're going to put into factory overhead.