 In this presentation we will take a look at a job cost system cost flow. We'll look at this cost flow a few different times a few different ways but now we want to get an overview of that cost flow. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. So we get an idea of where we're going. Well then look at the cost flow as we go through a comprehensive problem. When we go through a comprehensive problem however we often start to look at the very specific component that we are on in a fairly long problem. So as we do that we want to get an idea and keep an idea in our heads of what the overall cost flow will be so that we know when we're focusing in on one particular component how it fits into the big picture that will give us more context more motivation to learn the particular step that we are looking at. So whenever we think of manufacturing costs we want to think of materials overhead costs and labor and just about any inventory that we think of not just in terms of if we are the manufacturer they include these items in it. It's easy to think of inventory as materials so if we think of a TV we think of the materials that are in the TV but notice that a lot of that is going to be due to overhead and labor a lot of the cost a lot of the value a lot of what it is we just took the raw materials of a TV that wouldn't amount too much unless they were put together to format a TV. So it's important to know when we do a manufacturing company of course we are providing some of those products some of that value so we have the raw materials we're going to have the overhead we're going to have the labor we're going to have to account for all three of those in the cost of whatever we make we make a TV we got to include all of those in the cost of the TV we have to track all those costs so that we can include them in the cost of our inventory. How will that work then well if we start with our materials here clearly we will buy the materials whatever is going to be used to create our TV the plastic and whatnot that are going to be used to create the TV we're going to have those and that's going to be a part of inventory and then we're going to start to work on those and once we do that we're going to put it into what we call working process. So working process is us starting to convert whatever the raw materials are to the finished product the TV. So now our materials over here are going to be taken from the materials and put into a working process as we start the job as we start to get going with the process of making. Now we want to keep in mind that this working process this is going to be an account called working process and when we're thinking about a job cost system we're not going to be able to apply anything to this working process unless we can we can assign it to a job. So if it's within work and process we need to have it be supported by a job and that's going to be similar to if we had say an accounts receivable account we can't apply anything to an accounts receivable account unless we also have a subsidiary ledger and a customer to apply it to we need to know who owes us the money but when we go to a job cost system for working process it's similar if I put those materials from the materials to the working process account I need to know which job that we're working on and so that's going to be our criteria now if it's direct labor if we're making say let's go back to the guitars if we're making a guitar and we're putting the wood in the guitar we know exactly which guitar the wood's going to on the other hand if we're talking about some of these materials that we don't know exactly which guitar it's going to things like glue things like small components that are going to be included in the guitar it's not worth us to track exactly which guitar they go to we're not going to get a requisition form and say I need this specific amount of glue to put together this guitar it would be not cost effective to do so so what we'll do is we'll take some of this material and we'll put it into overhead we can't put it up here yet we can't put it into the working process account because we don't we can't assign it to a particular job and nothing goes over here until we can assign it to a particular job this overhead is also going to include any other type of overhead that we have so when we think of overhead in general these are all types of things that we basically expenses on the warehouse where we make things so that's going to include things like depreciation on the warehouse if we have a supervisor salary in the warehouse we don't know which job that they're working on so it's going to go into overhead if we have maintenance in the warehouse then all of that's going to go to some inventory but we don't know which job to assign it to so it's going to be in there if we have utilities in the warehouse it's going to be in overhead in that overhead then of course is going to be a cost that will be included in overhead then we're going to take that overhead and we will assign it to the working process how will we do that that's going to be one of the things that we'll have to figure out because we cannot just take this overhead and assign it to work in process we can journalize it in there and put it into that account but we need to know which job it goes to and that's going to be one one of our problems one of the things that we'll have to figure out from this step here to assigning the overhead to a job we're going to have to figure out which job gets how much overhead because some of the guitars are custom guitars some of them are more specialized than others it would be similar if we had like a construction company some of them that were larger companies some of them are smaller projects and larger projects we need to know how much of the supervisor salary or how much of the small materials we use how much of the truck and gas possibly would go into each individual job when they're not all the same in size and we don't have any way to assign them particularly to each job so that's going to be one of our problems that we'll talk through as we work through the job cost system the labor same thing we're going to take the labor and we're going to assign it to the work in process and that's going to be direct labor so anytime we have someone working on a particular guitar it's pretty easy for us to see which job which guitar that person is working on and therefore be able to assign their cost directly to work in process and back it up by job cost sheets however we may have some people working in the warehouse that we cannot assign to a particular job and those would be things like possibly the supervisor salary possibly the maintenance in the in the in there because we don't know which job it goes to and therefore we're going to say well it's still labor it's going to be labor we're going to have payroll happening but some of that labor is going to be directly to the job direct labor and some of it will be indirect if we can't assign it directly to the job then we're going to include it as well in this overhead so you can see this overhead is a big bucket of stuff that basically we cannot assign or it would be to not cost effective to assign directly to a particular job and therefore we will use some other format once we have these items in work in process at some point in time we are going to finish them within the work in process and we can then transfer them to the finished goods so once we're in finished goods then the finished goods is going to include all of these items raw materials overhead and labor within the job but we're basically going to have a job that will be completed and that job will be in finished goods we'll have the the concept or the account of finished goods note that these two accounts on the general ledger are just going to be one account on the on the general ledger we're going to have work in process but within work in process it's made up of a job cost sheets so these are like sub ledgers that are that are backing it up in a similar way as accounts receivable would be one account on the general ledger but it's supported by a subsidiary ledger breaking that information up by customer so in this case all of these accounts remember are going to be broken up or backed up supported by a general ledger account breaking the information out by date but these are also going to be supported by another account another ledger another source document that's going to give us the information in terms of jobs so the finished goods then is going to be one number we're going to transfer it from work in process to finished goods but we will still know which jobs are going to be applied to the finished goods and those jobs of course are made up of materials overhead and labor and then once we have the finished goods we're kind of at the end product now now we can sell them if we're talking about guitars we can sell them now right so now it's the final step which is similar to a merchandising company we sell and that will go to cost of goods sold now as we go through this process it's it's easy for us to forget about just the normal sales journal entry because this whole process leads up of course to us selling the inventory that's the point of the business but none of this is tracking the sales price we may use the cost sheets to derive this sales price but the sales price is not directly related to what we're tracking here we're tracking the cost so at the end of the day the last journal entry is going to be increasing sales credit to sales and debit the accounts receivable or cash and and none of that that journal entry is not being represented here because we don't know exactly what the sales price is based on this information what will be here is when we make a sale in a perpetual system the second half of that journal entry is debit to cost of goods sold the expense related to the sale that's what's here and a credit to inventory a reduction of the asset related to the sale and of course that cost of goods sold then is going to be comprised of jobs that we're going to be we're selling you know a particular job that we made particular guitars or particular construction jobs and those jobs consisting of materials overhead and labor