 Hello, this is Professor Farhad. In this session, we will discuss the flow of cost, specifically in a job order costing system. Now, the assumption is you understand what a job order costing is because we have a job order costing and process costing. You need to be familiar with both, which I covered both of these sessions in prior recording. But today, we're gonna specifically, theoretically first look at how cost flow through the system. Then we're gonna look at actual journal entries and go from raw material to finished goods. Actually, we're gonna get to cost of goods, so we're gonna sell that finished goods. So as a company, as a manufacturing company, we're gonna be incurring cost. Well, we're gonna be incurring all sorts of cost, but we can classify our cost under either material, labor, and anything that's not direct material. Not direct labor is considered manufacturing overhead. Now, after we purchase the material, what's gonna happen, which is raw material, the raw material is considered inventory. Then we're gonna take this raw material, let's assume we are manufacturing tables, so we're buying woods, wood as raw material. We're gonna take the wood and start the process, start to manufacture that table. Now, we have work and process, which is also an inventory account under asset. Now, we need labor, direct labor to work on work and process. We're gonna add the labor cost to work and process, and we're gonna see how in a journal entry, then we are going to have manufacturing overhead. All other costs, all other manufacturing costs, that's not direct material, that's not direct labor, it's called manufacturing overhead. And that's also gonna be added to the work and process. So we're gonna work on these tables, different jobs. Once it's done, once the tables are completed, we're gonna transfer them to finished goods. It means they are ready to be sold. That's excellent, it's ending inventory notice. Raw material, work and process, finished goods, they're all inventory accounts on the balance sheet. And for a manufacturing company, believe it or not, if you look at Ford Motor Company, they will have, or Tesla, they will have those three accounts listed separately. Now, what do we do with finished goods? Well, we keep it in finished goods until we sell it. Once we sell it, we expense it on the income statement in cost of goods sold. Now, we sold it, it's gone, it's done. This is what we need to do. Now, obviously we sold it, we get some money back, that's the whole process. Then we have other costs, such as selling and administrative. Remember, those are called period costs, and those costs are expensed. So they are expensed on the income statement in the period in which they are incurred. Versus finished goods, it sits on the balance sheet until it's sold. This is when we turn it into cost of goods sold. Now, we're gonna illustrate this whole process through a series of journal entries to show you how the cost flow, and this is the whole purpose, the flow of cost in a job order costing system. Now, the good news is process costing system basically follow the same concept, except rather than jobs, what we have is different departments. We have department one, department two, the assembly department, this department, that department, so on and so forth. Now, let's start by looking at an example. October 1st, Adam Corporation had $5,000 in raw material on hand. This is what we started with, and we purchased $40,000 in raw material. Well, what's the journal entry? We're gonna debit raw material, which is inventory account, and credit account spable, in case we purchased it on account. Excellent. October 3rd, basically two days later, Adam had 38,000 in raw material requisition from the store room for use in production. These raw material included 35 of direct and 3,000 of indirect material. So simply put, of this amount of 40,000 in raw material, we withdrew 38,000 of the 38, 35 is considered direct material and 3,000 indirect. What does that mean? The direct material is work in process. It goes automatically into work in process. The indirect material, it goes into manufacturing overhead because it's indirect, and we reduce our raw material. Now, if you wanna keep track of your raw material account, I'm okay with this. Now, you're down to 2,000. Now, we're gonna keep track. Now, we wanna keep track of manufacturing overhead and work in process because I want to show you the whole process till the end. So under manufacturing overhead, now we have $3,000 under work in process. We have $35,000. We assume that we have zero beginning work in process. In your textbook on the CPA exam, you might see beginning work in process. Here, I'm assuming zero. Again, when I'm explaining to keep the process simple, I start with zero, but you could see a beginning work in process. Da, it's not a big deal. You can deal with that. Now, before we go any further, I would like to remind you, before I remind you, most likely, you are an accounting student or a CPA candidate if you're listening to me right now. That's great. You found me on YouTube. That's excellent. Now, it's time to go a step further. Take a look at my website. Subscribe. I can help you with your accounting courses and CPA exam. I help many people over the years, whether they are accounting students or studying for their exams to help them succeed in their career. Don't hesitate. Take a look at my website. Consider investing. Connect with me on LinkedIn. Connect with me on YouTube. Subscribe, like this recording. Share it with other. Connect with me on Instagram, Facebook, Twitter, and Reddit. Now, this is what we have. We have manufacturing overhead of 3,000, work in process of 35,000. During the month, the employee time tickets included 39,000 of direct labor and 10,000 of indirect labor. Well, direct labor is considered work in process. And indirect labor is considered manufacturing overhead. Well, what's the entry? Well, we're gonna take the 39,000 and debit work in process, which is we're gonna add it to work in process here. The 10,000, it's gonna be considered manufacturing overhead. It's gonna be added to this account and we credit salaries and wages payable or we credit cash if we paid those employees immediately. Now, let's go ahead. Debit work in process, 39,000. Debit, manufacturing overhead, 10,000. Now, remember the debit to manufacturing overhead, the debit is the actual account. During the month, the company incurred the following overhead costs. Now, we incurred additional overhead costs. If it's actual, we're gonna be debiting the accounts for those actual overhead. Utilities, 1,500. Depreciation of factory equipment, 3,000. Property taxes payable on factory 1,200. So, notice the word factory is appearing and here utilities for the factory, property taxes payable on factory. What entry do we make? Well, we're gonna debit manufacturing overhead for the total, credit utilities payable, accumulated depreciation, property taxes payable. So, now what's gonna happen? We're gonna be adding more to our manufacturing overhead, which is actual cost. Actual, this is again, the debit side is the actual. Now, keep track of these accounts. Let's move on to the next slide. ARM uses a predetermined overhead rate of $2.50 per machine hour. And during the month, 4,000 machine hours were worked on the jobs. What does that mean? Now, we are ready to allocate overhead. Remember the overhead that's gonna go to work in process. But companies apply or allocate overhead based on a predetermined overhead rate, which we talked about in a prior session. The predetermined overhead rate is 250 per month, sorry, 250 per machine hour and we happen to incur 4,000 machine hour. What does that mean? If we take 4,000 times 250, we're talking about 10,000. So, we are going to debit work in process 10,000 and credit manufacturing overhead. Simply put, 10,000 is leaving manufacturing overhead. So, 10,000 leaving manufacturing overhead, going to work in process. With credit manufacturing overhead, it goes to work in process. It's not this 10,000, it just happens to be a random 10,000, okay? Now, let's keep going throughout the process. Now, we have work in process and now we have a new account called Finished Goods and we happen to have a beginning inventory of 3,000. I chose to have a beginning inventory for no particular reason. During the month, Adam incurred but not yet paid sales salaries of 3,000, advertising expense of 1,000. Well, you have to understand, sales salaries and advertising expense are considered period cost. What does that mean? What do we do with period cost? We expense them. We don't put them into work and process. They are expense as incurred. Therefore, we debit salaries expense 3,000, debit advertising expense 1,000, credit salaries payable 3,000, credit accounts payable 1,000 or we could have credited cash if we pay them immediately. It doesn't matter. The point is they are expensed. Those costs are expensed. Also, during the period, Adam completed jobs with a total of 25,000. Now, what does that mean? It means 25,000 of work and process was completed. When it's completed, it's gonna leave work and process and go to finished goods and specifically it's 25,000. Therefore, we debit finished goods 25,000. We credit work and process 25,000. Therefore, 25,000 left work and process and 25,000 more will appear in finished goods. It means now we have 28,000 in finished goods ready. Now we have 28,000 in finished goods. Adam sold 25,000 in finished goods to customers for 48,300. What does that mean? It means we sold 25,000 of finished goods. It appears it's this 25,000. We're not being able to sell this old 3,000. And once it leaves finished goods, it's gonna go to cost of goods sold. Therefore, first we're gonna record the sale. The sale is 48,300. It's giving debit account receivable because we sold it on account. Debit cost of goods sold, credit finished goods inventory. It means we transfer 25,000 from finished inventory to cost of goods sold. Now, again, there's nothing in cost of goods sold. If there's anything we can see cost of goods sold if there's any figures in cost of goods sold. We'll just keep in the numbers simple. So you keep track and finished goods, by the way is 3,000 in case you are wondering. And in case you are wondering too, if you wanna go back and we can look at manufacturing overhead and basically what happened in manufacturing overhead at the end of the day, if you notice here, we transferred from manufacturing overhead. If you remember 10,000, it means we still have a debit balance of 8,000 manufacturing overhead sitting there. It cannot sit there. Why? Because at the end of the period, you have to close this account manufacturing overhead. And this is what we have to deal with in a separate recording where how do you close manufacturing overhead? Because technically manufacturing overhead is a temporary account. It needs to be closed. So we need to close manufacturing overhead. This is what we'll do in the next recording. But what should you do now? Go to FARHAT lectures and work multiple choice through false exercises that's gonna help reinforce what we just talked about. Invest in yourself. Invest in your accounting education. It's gonna help you with your career. It's gonna help you with your professional certification. It's gonna pay you dividend down the road. Good luck, study hard. Don't sure change yourself and stay safe.