 Hello and welcome to this session. This is Professor Farhad. In this session, we're going to look at an example that deals with process costing. So we're going to see the journal entries that deal with process costing and as a result of this exercise, I hope I can show you how the process, how the cost flow within job order costing. So let's take a look at the first transaction and the first transaction reads 94,000 Afra material were purchased. So what's the journal entry for this? Well, the journal entry is you debit raw material. So what I'm going to do rather than do in the journal entry, I'm going to do T account. So I'm going to do raw materials. I purchased 94,000 Afra materials and I'm going to credit cash. So I'm going to go down here and credit cash. The reason why I just put cash away from raw material, because it doesn't really matter, I'm going to focus on the important account that are considered product account, a product accounts. Yes. Transaction B 89,000 in raw material were used in production. Okay. Of this amount, 78,000 was for direct material. That's important. And the remainder was for indirect material. What are they telling me here? What they're telling me here is I transferred from raw material 89,000. So I'm going to go ahead and transferred 89,000. I'm going to credit raw material, 89,000. And what am I going to debit? Well, I am going to debit. I'm going to debit manufacturing overhead. And I'm going to debit work in process. Now, how do I know which one goes to work in process and which one go to manufacturing overhead? The direct material is considered work in process. So it goes right into production. Right to the production line, 78,000. So of this 89,000, 78,000 went to here. And the remainder, the remainder obviously is, is let's see, 11,000. I'm going to debit this. 11,000 went to here. Went to manufacturing overhead. Went to manufacturing overhead. All right. Let me do this in a different color work in process. I'm just going to work in process. I'm going to have it as a green account. Work in process. All right. And you will see why I'm doing this. All right. Let's take a look at transaction C. Total labor wages of 132,000 were incurred, of which 112 was for direct labor cost. It means the people who are working on the line touching the product and the remainder is for indirect labor. Well, let's do this. So I'm going to have now wages payable or whatever you want to call it. I'm incurring wages. I'm incurring wages of this amount. Let's see again, 132, 112 goes to work in process. So what I'm going to do, I'm going to debit work in process 112,000. I'm going to debit. Oh, well, actually we're going to be paying those cash. It says we paid them. So it says, let me go back here to the problem. It says we're incurred and paid. Okay. So basically, I paid cash 132,000. Of this amount, 112 goes to work in process. 112 goes to work in process. And the remainder of 112, which is 112 minus 32 is 20,000. The remainder goes into 20,000, goes into manufacturing overhead. And this is for the indirect material. Okay. So far so good. Additional manufacturing overhead costing 143,000 were incurred and paid. So I paid cash. I'm going to credit cash 143,000. And I'm going to charge this to manufacturing overhead 143,000. Manufacturing overhead of 152 was applied to production using the company's predetermined overhead rate. They're not going to tell us what's the predetermined overhead rate. It doesn't matter, but we know that 152 was applied. So I need to transfer 152,000 out of manufacturing overhead, and it's going to go into work in process. Excellent. So I transferred 152 from manufacturing overhead to work in process. All the jobs in process at the end of the month were completed. What does that mean? It means all this account here, work in process, all the everything was completed. And this is 342. Therefore, I need to remove 342 from work in process and send it to, so I finished everything. I have no work in process to finished goods. So 342, I credit work in process and I debit finished goods 342. I transferred, I transferred it from work in process and finished goods. Now work in process is zero. I just transferred everything. It happens to be the case. That's not what usually happens. All the jobs were shipped to customers. Well, I sold everything. And they don't tell us how much I sold them for. It doesn't matter. I'm just showing you how things work. When you sell everything, what's going to happen, it's going to leave finished goods 342,000. So I'm going to credit finished goods, and I'm going to debit cost of goods sold. Now, how much did I sold them for? Assuming I sold them for half a million, I debit the account receivable, I credit sales for half a million, but we don't care about the sale, just showing you how the cost of goods flow. So notice raw material, manufacturing overhead and labor from cash. Those three went into work in process. Then work in process went to finished goods. Then finished goods is zero because I sold everything and everything ended up on cost of goods sold, which is it happens to be an income statement account. So this is hopefully, you see the flow of goods. Any underapplied or overapplied overhead for the period was closed to cost of goods sold. Now I need to know what happened to my manufacturing overhead. So let's go down here, and this is my manufacturing overhead. Let me go ahead and see what's going on here. On this end, if I add everything up, 0, 0, 0, 4, 6, 7, 174. So I have 174 debit. This is, it means this is how much I actually incurred. And the 152 is how much I actually applied or estimated to work in process, how much I actually applied. How much I applied versus actually what happened. What I actually incurred was way more than what I actually incurred. I'm sorry. What I estimated was less. So this is the estimated. Applied means estimated. I estimated I estimated 152, but I incurred actually incurred 174. What does that mean? At the end, I have to close manufacturing overhead. It means I need to credit. So I under estimated my overhead. I underestimated. So what's going to happen? I'm going to have to credit this account in additional 22,000. Let me do it in a different color. I'm going to credit this account. I'm going to credit manufacturing overhead 22,000. Because I under applied it. And I'm going to debit what I'm going to close it. I'm going to close it to cost of goods sold. I'm going to increase my expenses, increase cost of goods sold. Therefore cost of goods sold end up to be 364,000. And what happened to manufacturing overhead? Manufacturing overhead now is zero because I have 174 on both end. Therefore the balance is zero for manufacturing overhead. So hopefully you saw how the cost flows in a job order costing. Once again, we saw material went to work in process. Manufacturing overhead went to work in process and labor went to work in process. Anything that's done in work in process wants to finish good and we happen to finish everything, which is a little bit unrealistic. Then from finished goods everything transferred to cost of goods sold. And at the end of the period we determined that we under applied overhead. Yes, we underestimated overhead by 22,000. That account was closed to cost of goods sold. Now we could have also closed overhead to part of it to raw material, part of it to work in process, and part of it to cost of goods sold. But they told us close everything to cost of goods sold. Hopefully this exercise shows you how the process of how the cost of flow process, how the cost of flow, how the cost flow goes in a job order costing. If you have any questions, any comments by all means email me or see me in class. If you're studying for your CPA exam, or for your CMA study hard.