 Hello in this lecture we're going to work a problem using a process cost system. So remember when we use a process cost system that means that we are producing inventory. We're manufacturing and when we manufacture we either generally talk about a job cost system or a process cost system. Job cost system usually has inventory that is different in nature and difference in size and whatnot so we have to allocate information per job. Process cost means that we usually have very similar type of inventory and therefore we're going to allocate the cost in a process through the process like if we're refining oil or something like that. So process cost system here we're going to calculate the equivalent units at this time. So here's our data on the left hand side and we are going to use this data in order to calculate the equivalent units in an Excel type worksheet and just thinking about kind of the format of the worksheet whether you do it by hand or whether it's in Excel is half the challenge like it is for many type of accounting problems just setting up the way this thing should look. So we're going to start off calculating the costs that we need to account for during this time period meaning where we allocated the cost obviously in the prior time period we're looking at the current cost that we're going to have to allocate we're going to use equivalent units in order to do so. So let's think about just dollar amounts first. If we have a beginning working process we're going to start and they're going to give us these numbers these are going to be the dollar amounts we're not talking units here so we're going to say the direct materials are 9900 and the conversion are 110970 and therefore the total if we use our trusty sum function equals SUM brackets of the 9900 plus to 110970 we come to the 1287 we're going to add to that the dollar amount that was incurred during the month for direct materials and conversion remember that conversion means that it's the stuff that changed the direct material to the end product so that's going to be things like direct labor and overhead things that converted the direct material. So that's going to be the 2484 and the 1082970 for conversion. Once again we can sum those up summing these up using the SUM function 2484 plus the 1,082,970 gives us the 1,331,370 we can then sum them up this way as well having a total column allocating the total cost whoops I made an equal sign there equals the sum of the 9,009 plus the 2484 tab equals the sum of the 110970 plus the 1,082,970 tab equals the sum of the 12870 and the 1,331,370 and enter and of course it should also add up this way as well 1,452,240 is our total. Now that's pretty straightforward we know what the costs are in terms of the dollar amount what we don't know really is how to allocate those costs between these two departments we're assuming that department a happens before department b so we have to do something like packaging or you know a production before the packaging department and something like that so we have to allocate the items to a department and then it goes through a department and then we're going to take that inventory that working process apply it to the second process that process being b similar to production if we're if we're making something we're going to do the the production of the item and then maybe the packaging of the item next we're going to move from talking about dollar amounts at this point to talking about unit amounts and we're going to use the two of these of course to calculate the cost for equivalent units so we're moving to units and note we're going to basically have a calculation like this that we got to just kind of memorize and think through whenever we do this type of problem where we want to break this out into the format of beginning units that we have plus those units started and completed and then minus the ending units and I mean plus the total ending units gives us the total units available now I'll explain why we need to break that out in this way as we go and that's what we will be putting in here so we're going to say that the 3000 beginning inventory in units is given to us here so we have units 3000 those are in process so again if uh if they're if they're in the processing part they're already in there in in this month they're already in the working process in the processing what has not happened yet is the conversion the labor and the overhead in order to process those raw materials to finished goods so in terms of the raw material when we think about a FIFO method we're generally going to say that we're we're not going to have any conversion or any cost related to the material that's already in the process at the beginning that's going to be a usual assumption under FIFO because all the material went in there last time the only thing that's lacking in the process is going to be the direct labor and the overhead therefore the amount of cost that we're going to allocate of this additional cost is not going to be included because all that material costs went in there prior before so we're going to say of course then the 3000 units times zero is going to be nothing for this month this period whatever this period may be and then on the conversion side it says that the beginning working process from last month that's already in process has 40 percent complete so how complete is it I mean what are we going to have to do to it this time in terms of labor and overhead we're going to have to say 1 minus 40 percent and it's going to have to be 60 percent so if it was 40 complete last time and it's a first in first out we're going to finish whatever's still in there this time and therefore we're going to have to do the other 60 percent so of these 3000 total units we're accounting for equivalent units we're going to take times 60 percent is going to be that 1,800 equivalent units so then we're going to have to calculate the units that are started and completed now the reason we want to do this is because of course if they started it and completed it then the equivalent units are going to be 100% both for materials and conversion that's why we want to break this out in this kind of funny calculation we haven't really worked with too much before and break out the amount that are started and completed for this equivalent unit calculation we can do that in this case by saying okay here's the amount that was completed uh the units completed and transferred out 22,200 and we're going to assume minus the ones that were those 22,200 includes the beginning inventory because we're assuming FIFO so if it was in there at the beginning that that's part of the units that were transferred out therefore that minus the 3000 means that the amount that was started and completed this time is the 19,200 and if it was started and completed then 100% of the materials went in this time so we're going to say the 19,200 times 100% equivalent units are the same same with conversion we completely can finish the conversion process so 19,200 times 100% that's why we do this started and completed and then we're going to have the stuff that's still in there it's still in the processing department at the end of the time period so we're going to say that that's going to be this given to us in this 2400 still in working process 2400 and they're going to have to tell us well how converted are those we started them we put them into process now and we haven't yet finished them how finished are they problems going to have to give us a number on that and they're going to say okay it's 40% complete but that 40% complete is going to be allocated to the conversion part of it because remember that we don't really need to have any number to tell us how complete it was in terms of material because the usual assumption for these when we talk about first and first out is that all of the materials went in the process so 100% of the materials are kind of assumed for most problems that went into process the only thing that hasn't happened is we haven't finished converting those materials using direct labor using the overhead to produce the finished inventory so we're going to say that for materials the 2004 times 100% they are uh total the same as far as conversion the conversion of those direct materials they're only 80% complete so for equivalent units for them for the conversion we've got the 2004 times the 80% and that's going to be only uh one nine uh two zero so if we sum these up then we're going to say some of we've got the 3000 units plus the 19 started and completed plus the ending those are the units that we're going to have to allocate out in terms of the cost that we had during this time period and in terms of equivalent units for materials we're summing up none of the beginning because those were all in there last time all of the ones that are started and completed and all of the ones that that were started and not completed are going to be in there and then in terms of the conversion equivalent units equals the sum of the 1008 the stuff we finished in the beginning plus of course all of that was started and completed and this and the portion of the stuff that's not yet done in the end so note what we have here we've got the total units in terms of total units we need to account for when we talk about equivalent units we're talking about equivalent and units in terms of either materials or conversion that's why we have two of them it's not like we have added these up and we have 44 520 equivalent units no we have equivalent units related to materials of 21 6 always going to be equal to or less than the total units and we have equivalent units in terms of conversion of 22 9 20 always of course being equal to or less than the total units that we're going to account for now that we have the total dollar amounts and the equivalent units we can calculate the cost per equivalent unit here and before I do that just want to point out that in order to do any of these problems again they're going to be very similar in nature just like many accounting problems and if you memorize just kind of this table whether you write it by hand in a test format or do it in excel or something like that so you want to basically be able to put this table into place then what we're going to do is we're just going to take the cost incurred this period in terms of dollar amounts divided by the equivalent units so the cost of this period just remember you're taking the cost that was incurred this period not the total cost because we're allocating the cost that were incurred during this time so we're going to say that's going to be the materials 248 4 and for the conversion we're talking about the dollar amount cost is going to be the 1,082,970 for conversion and then we're going to divide that by equivalent units so for materials we had the 21,6 equivalent units and for the conversion we had the 22,9 so we may even want to put the dollar signs here so if this is going to be dollars this is going to be dollars i'm going to format right click and go to format cells and make it maybe currency and add the add the dollar and take off the decimals so so this is units these are dollars so this is the current dollar amount divided by the units is going to give us the cost per unit the cost per equivalent unit we should say that's going to be the 248 4 divided by the 21,006 gives us 12 if I go to the home tab numbers and add decimals not that many decimals we got to 1150 let's do the same thing here we're going to say we're going to take the 1,082,970 divided by the 22,920 and once again go to the home tab numbers add decimals and we get the 4,725 those are rounded numbers so you know obviously we could be different by pennies you could have some rounding differences okay so now that we have that then we can go to our this type of calculation out here the total cost accounted for and try to see okay how much of the cost this period we're going to allocate to the current production and remember what we're doing we're in production a and how much got transferred out to the next cycle so kind of like if we're producing something and then what goes from one department to like the packaging department we've made something and then we're going to package something or something in a process system like that so now that we have our equivalent units we're going to come down here we're going to say let's take our beginning number in terms of total cost in working process that's going to equal total cost given here so we've got the total cost and then we're going to be allocating the cost to beginning inventory again you want to learn basically this format how to set up this format of table when you when you're working these problems now note that this table is going to be similar to this table we're going to be drawing data from this table down here and putting it into here so we're trying to calculate out the cost per equivalent unit and we're going to need the units and we're going to need the cost per equivalent units so we're talking about the cost at the beginning inventory we've got the direct materials and we're going to use the equivalent units i'm going to say where does this number come from it's going to be up here and and we're talking about material so it's this number here remember equivalent units was zero and therefore if we pull out the rest of the calculation zero equivalent units times whatever the cost per equivalent unit was which is of course 1150 will result in zero times the 1150 or of course zero when we talk about the conversion for the beginning inventory see we're going to go back to this table i'm going to say this equals the equivalent unit table for the materials and i'm sorry for the conversion in this case the beginning for the conversion and that's going to be this 1008 and then we're going to get the cost per equivalent unit from our cost per equivalent unit table which is of course is 4725 tab and then if we multiply that out we're going to say okay we have 1008 times the 4725 that gives us the 8550 so therefore the total cost to complete the beginning inventory in terms of both the direct materials and conversion is going to equal the sum of the zero and the 85 150 now we're going to do the same thing for for the next one on this table so we just basically did this piece of it and i'm so i'll make that green we'll say we did that and now we're going to move down we're going to do this piece similar fashion down here and do our similar calculations so once again we've got the direct materials and conversion for cost of units started and completed so i'm going to say this equals and we're going to go back up to our equivalent units table the 19002 tab sorry let me go back up here for the direct materials it's going to be the same but it's going to be the materials here that's this number here tab and then we're going to get the number for the materials for the cost per equivalent unit 1150 tab multiply that out so this is the number of units for materials that we started and completed and it's 11.5 1150 per unit conversion same thing we're going to say this equals we're going to go to our units table so we're on this one run the conversion here 192 because they all started and completed same number because they were started and completed and then the cost per unit the 4725 if we multiply that out then we get the 1900 times the conversion per equivalent unit and that gives us the 907200 let's sum that up summing up the cost of units started and completed then being the sum of these here so then i'm going to i'm going to go back up here and say okay we found a home for this one and then we're going to do a similar calculation of course for the last one for the ending working process here and before we do that let's clean up some subtotals that we have so we have a subtotal here that's going to say the total cost of units at the beginning inventory so remember we're talking about the working process that's still in department a and the units that were in there at the beginning allocating the cost that cost that's already in there is the stuff that happened last time like last month the 12870 in terms of dollars that was given to us way up here at the beginning that's what's in the working process at the beginning then we allocate kated another 8550 to those units that were in process at the beginning therefore if we add these two up we're going to say the sum of what was already in the working process plus the stuff that we allocated the dollar amount we allocated to those units that were in process at the beginning means that we have 205920 there then we have this subtotal down here total cost of units transferred out meaning they're going out from the department we are looking at department a going to department b kind of like if we were producing something and then it goes out of the production department to the packaging department so that means that under a five-fold method everything that was in there at the beginning this whole 205920 we're talking dollars now of the units that were in there at the beginning the dollar amount applied to those units plus everything that of course was started and completed that's the dollar amount that we need to take out of department a and move to department b so this is going to be the sum of we're just going to add up the 205920 dollars allocated to the beginning units plus the one million one twenty eight thousand dollars allocated to the unit started and completed this is the amount going out from the department a we're looking at to the next department department b now we're going to figure out what is still left in department a that has not yet gone out to department b in terms of dollar amounts we're going to use of course a similar calculation direct materials is going to be here we're going to look at the equivalent units i'm going to say this equals and scroll up to our equivalent units in terms of materials so here's the ending materials uh two four of course all of those are in there because we started it and that's the first thing we do when we start the new thing and we're going to say cost per equivalent units for materials we're going to equals that's this 1150 we calculated tab and then we're going to multiply that out so this equals the 2004 times the 11 dollars and 50 cents gives us the 2760 i'm sorry 27600 and then we're going to say this equals the conversion side of it same type of thing we're going to say the equivalent units for conversion end ending inventory is going to be this 80 complete or the 109 20 and the equivalent uh the cost per equivalent unit is this 4725 we calculated therefore we're going to say that this equals the equivalent units 109 20 times the 4725 gives us the 90270 if we sum those up equals the sum of the 27600 plus the 90700 that gives us the 118 uh 118 320 now there's last number just basically a check figure so what we're doing is we're just going to say this equals the sum of the the total amount that's going to be transferred out plus the amount that's still in the working process for department a that gives us the 1,045 240 why is that a check figure because that should match what we calculated up top in terms of total costs the 1,042 240 the 1,042 240 so we allocated this total cost including what was in working process and that amount that was added during the process instead of breaking it out this way we have now breaking it out to the amount that needs to be transferred from the department a to the amount that's still in there in the working process for a so if we did that we could take a look at our journal entry over here and see what would the journal entry look like if we had a trial bounce it might look something like this we just put I just made up some numbers here so we got the assets here we have this amount in the work in working process for a because that of course is the beginning plus all the costs for that time period and the idea of course that being we have to take it out of department a and put it into department b for the amount that was completed through the production process that's now going to like that second process possibly to a to a packaging department or something like that of course we're in balance here and we can make this journal entry so all it's doing is going from one asset account to another asset account that asset account being of course inventory type of counts of work in process so it's going to go into b so I'm going to copy b that's going to be the debit and paste it one two three and the amount then is going to be equal to you know if we got to go scroll back over here I'm scrolling down the my table and we're going to take this number here why that number because that's the amount the cost that we're transferred out and once we take that out we'll be left with this number the one eighteen three twenty so we're going to take this and that's going to be the debit and the credit and we're going to take it out of department work in process for a so I'm going to right click and paste it one two three then if we were to post this to see what this does to an actual kind of trial balance here we would say that uh here we're going to say this equals the uh this debit and now of course working process goes up for b like the packaging department we're going to say and then working process for a what's still in there we're going to take out this amount with the credit and that leaves us that ending balance on our worksheet the one eighteen three twenty of course there's no effect on the income statement for this process because we're only uh allocating the asset through our production process at this point it will affect the income statement in the form of cost of goods sold when we finally sell our inventory but of course it's going to have to go from b to finish goods and then finish goods to cost of goods so