 Hello, and welcome to this session. This is Professor Farhat. In this session, we are going to discuss process costing. So to discuss process costing, it's very important to contrast and compare process costing to job order costing or job order, which we looked at in a prior session. So what is process costing and what is a job order costing? Both of these systems are cost accumulation system. When do we use one versus the other? Well, it all depends on the product that we are producing. If we are producing homogeneous product, product that are the same, then we use process costing. If we are producing unique product, product that for each job, we need different resources, then we use job order costing. So simply put, to summarize, when do we use job order costing? When we are manufacturing many different jobs are worked on during each period with each job having a unique production. So we could have work process one, work process two, work process three. So we have many different jobs. Costs are accumulated by job. So each one of them is a job by itself. Unit costs are computed using job cost sheet. So we keep track of each job using a job cost sheet. For example, job number 551A. This is a job. So we'll have its own job cost sheet. Now, we talked about this in a prior session. Our topic is not the job order costing. Although there are many similarities between job order costing and process costing. In this session, we're going to be looking at process costing. When do we use process costing? A single product is produced either on a continuous basis or for a longer period of time. And all the units are identical, are the same. Once again, a good example is when you're producing milk. You're producing milk. You're continuously producing milk for a long period of time. And each gallon of milk is the same as the other gallon of milk. Therefore, we use process costing. And in process costing, costs are accumulated by department. So rather than job order, rather than by a job, we are keeping track of each of the cost by department. So we have department one, department two, department three, so on and so forth. Unit costs are computed by department. And we'll see the best way to illustrate this is to see an example. But let's keep on working. So let's take a look at similarities because they are pretty much very similar in terms of journal entries and accounting bookkeeping record. Both system assign material, labor, and here we mean direct material, direct labor, and overhead to product. And they provide a mechanism for computing unit per cost. Da, we use direct labor, direct material, and manufacturing overhead. No surprises here. Both system use the same manufacturing account, including manufacturing overhead, raw material, working process, and finished goods. Also, we're gonna see again the raw material, working process, and finished goods as well as manufacturing overhead. The flow of cost through the manufacturing is basically the same in both system, which I will show you this in a moment. So let's take a look at the first quiz ourselves. Process costing is used for product that are what? Different and produced continuously, not different. Similar and produced continuously? That could be a good answer. Individual unit produced customer specification? No, this sounds like a job order. Purchase from vendors? No, when you purchase from vendors, you're not really manufacturing anything. The answer is similar and produced continuously. This is the definition of a job costing system. So what do you mean by processing unit? The processing department. Any unit in the organization where material, labor, and overhead are added to the product is called the processing department. Assuming we are making bread, we are making bread. So guess what? The first thing before we make the bread, we have to mix the dough. Then we take the dough, simply put, we put it in the oven, and we have bread, okay? So making the dough is a department. Baking it is another department. And maybe before we sell, not maybe, before we sell the bread, we also package it. So simply put, in this example, just kind of, I thought about it now, there is a mixing department, there is a baking, and there is a packaging. So before we, then we have bread. Then we have bread ready to be sold as a finished product, okay? The activities performed in the processing department are performed uniformly. So when you mix the dough, you mix the dough altogether in the mixing department. Furthermore, the output of processing department must be homogeneous. So when you transfer the dough to the baking department, they all look the same, they all feel the same, they all weigh the same, and when they are cooked, they are cooked all the same way. Product and process costing environment, typically fall in a sequence from one department to the other. So here we go from mixing to baking to packaging the bread, to obviously, obviously at the end, selling the bread. And this is another picture of what we just talked about. We have material, labor, and manufacturing overhead. For example, in my example, the dough is the material, the direct material. The labor is the people who are basically mixing it all together. Direct labor and manufacturing overhead will be the utilities, taxes, et cetera, that are consumed in that manufacturing plant for the bread. So all this goes into work and process. And once it's done, once the goods are baked, once the dough is baked, it goes into finished goods. Then once we sell it, it goes into cost of goods sold. Same thing with for job order costing, rather than using work and process, okay, rather than using work and process, the only thing we do is we have jobs. So job order costing, trace and apply, sorry, job order costing, a trace and apply manufacturing cost to jobs. So we have different jobs. Now for process costing, we use departments. For the process costing, we use departments. So material, labor and overhead goes into work and process, which is, it's a department. Now on this process, we could have, we could have a department one, we could have another department, department two, then finished goods. Or we could have department one, department two, department three, then finished goods. So we could have more than one processing department. And usually we do. For this purpose of this example, assume there are two processing department, department A and department T. Let's take a look at the T account transfer. So what we do is when we assure our material, we credit our material, some of it go to department A, some of it go to department B. Then we incur, and this is the journal entry, we debit work and process, department A, we debit work and process, department B, and we credit our material by transferring raw material to work and process. So job order costing material are drawn from the store room using material requisition form. Obviously material can be added in any processing department. Here's the journal entry and you just saw the journal entry. The next thing we're gonna look at is labor, specifically direct labor. Direct labor is salaries and wages payable is credited. Direct labor is transferred to department A and some direct labor is transferred to department B. And this is the journal entry. We increase salaries and wages payable. We increase work and process department A, work and process department B for direct labor. Okay, in process costing, labor costs are traced to the department, not to individual jobs, to the department, not to individual jobs. The following journal entry record the transfer. Okay, let's take a look at manufacturing overhead. Same concept, we have actual, we have the manufacturing overhead, the debit is the actual and the credit is the applied or the estimated. So we apply based on a predetermined overhead rate, we apply overhead to work and process department A and work and process department B. And this is the journal entry. We reduce manufacturing, we apply from manufacturing overhead and we increase department A, work and process and department B work in process. Then once department A is finished, once we have everything done 100% in department A, we transfer everything from department A to department B. Transfer to the part, yeah, went from A to B. So the goods goes from A to B in sequence. Okay, so we credit the department A work in process, which is an asset and we debit work and process department B and simply put, we increase department B work in process and we reduce work and process in department A. Then once the goods are sold, let's assume we sold, I'm sorry, not before they are sold. Then once they are done in department B, once they are done, once they are 100% finished in department B, we transfer the goods to finished goods, which is also an inventory account. And once the goods, it says the journal entry, we increase finished goods and we reduce work and process, now indicating that the goods are completed and they are ready to be sold. Now we sell them, once they are sold, they leave finished goods, we credit finished goods, we reduce finished goods and they increase cost of goods sold once the goods are sold. And this is the journal entry, we debit cost of goods sold, which is an expense account and we reduce our finished goods inventory, obviously at the same time, we debit account receivable, we credit sale for the amount that we sold them for, okay? So this is basically an overview of process costing. In the next session, I'll take a look at a more specific example and how we account for the cost in each department as far as material, labor and overhead, which we're gonna call conversion cost. Hopefully this gives you an idea about process costing, very similar in terms of journal entries to job order costing. In the next session, we'll look at something a little bit different. If you are studying for your CPA or CMA exam, by all means, study hard, it's worth it.