 Hello and welcome to this session in which we will discuss process costing. It's very important to understand process costing in the context of looking also at job order costing. Because both process costing and job order costing are cost accumulation system. Therefore, it's very important to look at process costing relative to job order costing so you can appreciate the context, the meaning of how process costing work, how actually the process costing work vis-à-vis the job order costing. So when we talk about job order costing, which we discussed in the prior session, it's we're looking at customized production. We're looking at unique or special order. We are manufacturing something that's unique to a particular client like a customer jewelry. For example, my ring, my wedding ring, has the initial of my wife and the date we were married. Well, that's custom. If you have a tattoo, that's a custom job. Wedding invitation, if a company is ordering an airplane, that's a custom job. They wanted a specific color. They want certain feature inside that plane, so on and so forth. And the job order costing, you have many different jobs that are worked on during each period. So you might have many job, but each one of them has a unique production requirement. Why? Because each one of them is unique. That's the idea of a job order costing. You are not mass producing. You're going to be mass producing here under process costing. Now, you might produce four, five, six items. Nevertheless, they are still unique. And in job order costing, costs are accumulated by individual job. So we have this idea of jobs. Each order is a separate job. So unit costs are calculated by job on something called a job cost sheet. And we looked at the job cost sheet when we talk about job order costing. So we might have job number 517. And for that job 517, we might have work, its own separate work in process. We might have job 589, its own work in process, job 757, work in process. So it would look something like this. We will have direct material, direct labor and manufacturing overhead going into the jobs. Then once that job is done, it moves to finished goods. So job order costing system, trace and apply manufacturing cost to jobs. Now, let's talk about process costing. When we say process costing, which the topic for this session, we are looking at a single product that's produced either on a continuous basis or for a long period of time. What are we talking about here? When PepsiCo produces those soda bottles, they don't produce one, two or 10 of them. They produce hundreds of thousands and they are all basically the same. If you're producing gallons of milk, if Hershey's producing chocolate bars, Crayola factory producing crayons, they produce hundreds of thousands of these units. So this is what process costing is, you are mass producing. All units are identical. And cost here is accumulated by department rather than a job. Costs are computed by the department, they're accumulated by the department and unit cost is computed by the department. So we say the unit cost per this department is that much. For example, we would have department one and we'll have its own work in process. We will have department two. It will have its own work in process. We'll have a department three and we'll have its own work in process. And let's assume we are making bread. First, we mix the dough, the water, the salt, that's the mixing department. Then once we fully mix it, it's 100% ready, we move the product from work process department one to department two where we actually bake the bread. And once the bread is baked, we move it from the baking to the packaging where we package it and now it's a finished product. So notice what's going to happen is we're going to have a cost incurred in this department, cost incurred in this department, cost incurred in this department. So it's going to cost us, for example, for mixing 50 cents per loaf of bread, pretty expensive bread, to bake it 25 pennies and to package it 10 pennies. All those three costs together would represent the cost of the bread, which is, if my math is right, 85 pennies per package, I guess this is per package. So what is a processing department? So how do we know it? That's the department. Well, any unit in an organization where material, labor and overhead are added to the product, it's called the processing department. And we could have two, three, many processing department until we get to the end product. And cost flow from one department to the next. So once we are done with mixing, once we are done with mixing, the cost, the total cost is transferred to baking. Then baking plus mixing, once it's done, it's transferred to packaging, so on and so forth until the product is done. And don't worry, we're going to look physically at an example, see how it looks physically, then we're going to work journal entries later on in the next session. And we assume here that activities are performed uniformly in this process. And this is what the picture would look like. For process costing, what's going to happen is we're going to have material, labor and overhead, and it's going to be work and process in that department. Then once we are done with this department, we move it to the second department, again, we'll add direct labor, direct material and manufacturing overhead. And once that will have a WIP for that department, once that done, if the product is finished, it goes into finished goods, or it might go into a third department, so on and so forth, until it's sold, then it becomes cost of goods sold. Now, bear in mind that both system, both cost accumulation system, assign labor, material and overhead to product. They use the same manufacturing account, direct material, direct labor, manufacturing overhead. So everything that you learn under job order costing, you're going to see again here. And the flow of cost through the manufacturing is basically the same. So material, labor, overhead goes into a job. If the job is done, it goes into finished goods. Material, labor and overhead goes into work and process. Once that department is done, they move it to the next department, and if the process is done, they move it into finished goods. Now, the best way to illustrate this concept is actually to take a look at an example. Before we look at an example, most likely if you are watching, you're either an accounting student or a student taken an accounting course or a CPA candidate studying for your CPA exam, either or welcome. You have, you have arrived. I can help you. I can help you do better. Go to farhatlectures.com where I have additional resources, lectures, multiple choice, true, false. That's going to help you do better, understand the material better. I don't replace your CPA review course. I'm a useful addition. If you have not connected with me on LinkedIn, please do so and take a look at my LinkedIn recommendation. Like this recording. If it's helping you, if you're watching, it's helping you. Like it. It will help others share it. Connect with me on Instagram, Facebook, Twitter, and Reddit. So what is process costing? Well, each process is a separate production department. Now, let's take a look at an actual example. Remember, each process is a separate production department and each process applies material, labor and overhead to the product to move the product to completion. And for our product, we're going to be manufacturing or we're going to be producing manufacturing actually for that matter. This best mix bag, which has peanuts, chocolate, and dried fruit. This is our end product. Here's what we need. We're going to need peanuts. We're going to need chocolate and we are going to need dried fruit. So this is the direct material that we're going to be using in separate department throughout the process. Now, we're going to have two department, a roasting department and a blinding department. And here's what's going to happen. First, we're going to take the peanuts and input the peanuts into the roasting department and we're going to roast it. Now, the peanut is the direct material. Now, this roasting department, it's going to consume electricity. It's going to consume maintenance. A people is going to adjust the temperature, make sure everything is running smoothly. So this department will have direct material, the peanuts, direct labor plus manufacturing overhead. Then once the peanuts are roasted and oil, they're going to have oil and other stuff. Once they're done, we move them to the blinding department. Once they are in the blinding department, we'll add the chocolate and we'll add the dried fruit. So this individual here responsible for adding the chocolate and the dried fruit. So notice we have direct material, we have here direct labor, and we have to have electricity, maintenance, so on and so forth for this blinding machine. And once, once they're blended all together, well, the packaging is minor. We're not going to have a separate packaging department. It gets packaged real quick. It's a minor process and the product is ready. So this is the process. For the sake of our example, here's what we're going to assume. Okay? And we're going to make this assumption to make the math easy, to make the illustration easy. We assume that direct material is 100% completed as soon as we start the process. And this should make sense. Basically, the direct material, once you place it inside the roasting machine, you're done with the material, right? And the oil should be there if you want to consider the oil direct material as well, which we are not. Also, once you put the chocolate here, it's completed. And once you put the dry fruit, so we're going to assume that direct material is 100% completed as soon as we start the process. Now, we're going to have a four-step process using the weighted average to determine the, to determine, to illustrate process costing. The first step is to determine the physical flow of units. Step two is to compute something called AUP, equivalent units of production. And how do we compute AUP? Let me show you what AUP is. Let's assume I told you I have eight glasses of water, which are half full. Well, eight glasses of water, half full, are equivalent to four full glasses of water. So this is the equivalent unit of production. Now, how do we compute the equivalent unit of production? What I suggest you do is you take this formula down. And specifically, this formula is for the weighted average because we can do process costing using the weighted average or FIFO, which we look at. We would look at FIFO later, but now the weighted average, make sure you take the formula. And how do we compute this? We're going to illustrate this, just write it down for now. The number of whole units completed. And when we say completed, it means completed 100%. It means its labor material and overhead has been completed and transferred out, means transferred either to the next department or transferred to finished goods if it's done. Plus the number of equivalent unit and ending inventory. So we have to compute the equivalent unit and ending inventory. Notice here what I want you to notice if you want to write this down. No beginning inventory. We don't care about beginning inventory because we assume beginning inventory is mixed with work and process. Well, we started this period. Then after we compute the equivalent unit of production, which is step two, we compute the cost per equivalent unit. Now we computed how many units we have. Now we have to compute the cost per unit. How do we do so? Once again, we are using the weighted average, not FIFO. We'll take the cost of beginning work and process. We're going to have some units not completed as of the beginning of the period. We're going to add to them any cost incurred this period. Now this cost will include direct material, direct labor, manufacturing overhead. This cost will include direct material plus direct labor plus manufacturing overhead. And we're going to divide this by the EUP that we computed in step two. Then we are going to assign and reconcile the cost. Now the best way to illustrate those four steps is to actually look at an example. So let's start to take a look at some numbers, examples to illustrate all these concepts. And if you want to take notes, if you don't have the PowerPoint slides, if you're not a subscriber, please make sure you take notes. From the month of May, we have 30,000 unit and beginning inventory in the roasting department. It means now we are working in June, but at the end of May we had 30,000 unit not completed. If they were completed, they will not be in the roasting department. They will move on. So remember what we said about this process is direct material is 100% completed because as soon as you start the process, the material is done. So they're missing direct labor and manufacturing overhead, which is remember direct labor and manufacturing overhead is called conversion cost. So they are not 100% completed as far as conversion cost. Units started in June. So we started 90,000 unit. If we had 30,000 at the beginning of the month of June, coming from May, we started 90. It means we have 120,000 unit to account for for the month of June. Now unit transferred to finished goods, finished goods here is the next department during June was 100,000. So we had 120 to account for 100,000 were transferred out. Why were they transferred out? Because they are 100% completed to direct material and conversion cost. What does that mean? It means we still have 20,000 unit those 20,000 20,000 unit. Once again, to make it easy for direct material, they're 100% completed again, they're missing conversion costs. They are not 100% completed. So ending work in process is 20,000 unit. Again, those are material are 100% completed, conversion cost or not. If they were completed as far as conversion cost, we would not have ending work in process. Now, if we take the 100,000 that transferred out and what's left are total units accounted for, which we did. So total units accounted for should equal to units to account for. So we know 120,000. Now, beginning work in process again, it's 100% completed as far as material, 65% completed with respect to conversion. Now for the weighted average, we can ignore this. We can ignore this. We don't care about what's the degree of completion, because everything's going to be mixed up. We're not using FIFO. Ending work in process again, we have 20,000 unit 100% completed as far as material, 25% completed with respect to conversion. They're at the beginning of the conversion process. So this is what we have. Now we have to be giving cost. Here's what we have. Remember, we have some units, specifically 30,000 unit coming from June, from May. As of May 31st, we spent $95,000 about direct material cost for those 30,000 unit, which is all the material cost that's needed, and 110,000 conversion cost for those 30,000 unit. It means we invested or we have invested in the process 205. During June, now we're going to, we started 90,000 unit. We're going to incur additional cost about those unit. Direct material is 280. Remember, this belongs all to June, because remember, we don't need to spend any more money for material. And direct labor cost 170. Factory overhead applied at 120 of direct labor, which is 204. It doesn't matter together. They give us 374, the conversion cost those two together. Total for the month of June, we invested 654,000. Some of it was for, you know, to complete the one that we started, that we started in May, and some of them for the, for the month of June. Together, the total cost to account for is 859,000. Now, keep track of this number, 859,000. So this is the data that we are giving. Let's stop, start with step one. Step one, determine the cost flow. We already did this. We said the beginning working process was 30,000 unit. Unit started is 90. Total units to account for 120. Then again, unit completed and transferred out were 100,000. Ending working process is 100,000 total, total unit accounted for 120. Those two should equal to each other. So you might have multiple choice questions to compute total units to account for or total units accounted for. Those two numbers should be the same. Make sure you are comfortable in computing those two figures. So we are done with step one, which is determine the physical flow of units. Second is this. Now we need to compute the EUP equivalent units of production. Well, as far as material, we have, remember, we have 100,000 units completed and transferred out. Well, as far as the material, they're 100% completed. As far as the conversion cost, they're 100% completed. Why? Because they were completed, units completed and transferred out. If they're completed, they should be 100% completed as far as the material, as far as to conversion cost. Now, equivalent unit for ending inventory. Remember, we had an ending inventory 20,000 unit remaining, which is this 20,000. When it comes to material, it's 100% completed, as far as to material. When it comes to conversion cost, we said the process is 25%. Therefore, we'll take 25% times 20,000. And that's going to give us the conversion cost equivalent unit of 5,000. Therefore, EUP for direct material for the month is 120,000. For EUP material, the conversion EUP is 105 unit. Remember, the ending is 25. And I ignore beginning because which method I'm using, the weighted average method, not FIFO, not FIFO. This is step one and step two. Step three is compute the cost per equivalent unit. Now I have everything that I need. What's my cost? For the material from the prior month, I have 95,000 cost from the beginning work and process inventory. Then I spent an additional 280 this month. So total direct material is 375,000. I'll divide 375,000 by the EUP of material that I computed a few minutes ago. I find out my cost per unit as far as direct material is $3.125, pennies, $3 and almost 13 cents, 12.5 pennies. Conversion cost, I have 110,000 coming from the month of May. And I spent in this month 374,000. In total, my total cost for the conversion cost is 484. I have 105,000 EUP that I computed in step two. My cost per one unit as far as the conversion cost $4.60, almost 61 pennies. Now the total cost, obviously you can add those two to get the total cost per unit for material as well as the conversion cost. Step four, we're going to assign and reconcile cost. How do we do this? Well, remember, how many units do we have completed and transferred out? 100,000. 100,000. Now what's my direct material cost? My direct material cost is $3.125. So that's going to give me 312,115. And what's my cost per unit as far as conversion cost? 4.6095. That's 460,952 together. My cost of unit completed this period 773452. Remember, this went to the next apartment. This cost is transferred. We said after blending, I'm sorry, after roasting, we go to blending. So this goes to blending. This cost goes to blending. And the cost of ending work and process, what we have left is 20,000 unit. Again, as far as material, they are 100% completed. So times 0.315 will give us 62,500. Conversion cost, EUP is only 5,000 times 4.6095, which is equal to 23,048. Combine those two. This is what we have an ending inventory. This is not completed. This is what's going to be beginning inventory of July because they're not completed. Well, they're completed for material, but not for conversion cost. We add this plus this will give us 859 total cost accounted for. And if you remember on the first slide, this is the number that we said, keep in mind. So now we know where that number went. Some of it transferred out to the next apartment, some of the cost, and some of it we still have an ending work and process in the roasting department. This is called a sheet, a summary sheet. And basically it illustrates the whole concept cost summary. Basically, this is what we started with the cost of beginning inventory, then cost incurred this period. And remember this number 859. Sorry, if you can't see this, but this is basically a summary of what we did. This is step one, 30 plus 90 equal to 120. We started with we started with 30,000. Then we started this month 90,000. We transferred 100. It means we still have left 20. So 120 in total. The EUP material is the one that's transferred out 100% completed, which is 100,000. What's left 20,100% completed to material 25% completed to conversion. This is the EUP for material, the EUP for conversion cost. Then we'll take the cost for the material in total 375 divided by EUP will give us $3.12 cent cost per EUP for direct material for conversion cost total for 84 divided by 105 will give us $4.61. Again, if you want the total cost, you add them up. Now cost transferred out. Once again, we just did this, the direct material, what's transferred out the conversion cost, what's transferred out 773. And this is step four cost of ending inventory 85484. And remember total cost is right here. Now what we're going to do in the next recording is to prepare learn how to prepare the journal entries. But what should you do now as a student go to far hat lectures, what work mcqs true false and maybe some exercises look at additional resources for this topic. But we still have to learn about the journal entries. We still have to learn about five fo method. Accounting is important invest in yourself. Don't shortchange yourself whether you are a student or a CPA candidate. Good luck study hard. And of course, stay safe.