 Hello, in this lecture, we're going to talk about the process cost system. At the end of this, we will be able to define the process cost system, list the accounts involved related to inventory, journalize the activity related to the production of inventory in the process cost system, 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. First, let's take a look at our trial balance. We have our trial balance over here. The debits represented with no brackets credits having brackets, debits equal the credits by the debits minus the credits equal and zero. We have the assets and green liabilities in orange or yellow and then the lighter blue or the equity account the darker blue or the income income is here added up to a loss at this point on the books. That's what we have at this time. We will be focusing in on the accounts and the flow of the process through the processing and creation of inventory. Therefore, we'll be looking at the raw materials, which is part of inventory, the work in process part of inventory, then it goes to the finished goods. And then we'll talk about factory overhead. When would we have to use factory overhead? I'm going to put the factory overhead up here on the balance sheet because it will be part of inventory at the end of the day. So we can see them all together up here and we will not be looking at the units of production here. We'll take a look at that later. Here we're going to look at the flow of the inventory through these accounts using journal entries. So first we had the raw materials purchased on credit. So if we had raw materials purchased, we would debit the raw materials inventory. So inventory is going to go up and we're going to credit the accounts payable in this case. We're going to focus in on the general ledger accounts related to inventory. So obviously, there will be a general ledger account for the account payable, but we're not going to list it here. We're just going to list the inventory accounts raw materials going up 68,000 up by 300,000 to 368. That of course matches our trial balance here at 368. The other side went to the accounts payable there. That's our first transaction. Then we have the factory depreciation 50,000. So anytime something says the factory, remember that it's going to be a part of inventory. Now this is what we have to unlearn some things we probably learned in the past because we memorized the depreciation journal entry probably to be debit depreciation expense credit to accumulated depreciation. Now the reason we memorize it that way is because it's the matching principle and we have to debit the expense because we usually used some type of equipment in order to help us generate revenue. That's when we expense something, but just because we had depreciation doesn't necessarily mean that we're using it to generate revenue in that time period. In this case, we are depreciating in order to help generate an asset. That's why we're going to debit factory overhead, not depreciation expense can have to kind of unlearn that or relearn the rules on that to kind of understand that. Then we're going to credit accumulated depreciation. That would be the same as the normal process. So if we look at our general ledger accounts, then we are going to debit the factory overhead. Why is it in factory overhead? Because these are one of those things that we don't know exactly how to allocate it out yet. We're going to put it into factory overhead. We know it needs to be in the raw materials, but we're going to put it into the factory overhead first and then allocate it out using some kind of allocation method. We don't have the accumulated depreciation on the GL account. There would be one, but we're just going to focus on the asset accounts. The credit of course went to accumulated depreciation here. We now have the factory overhead at 50 on the general ledger, which ties out to the trial balance at 50. Then we're going to say factory utilities on account 28,000. So we paid 28,000 for the utilities. You probably automatically think in your head, utilities, how do I record that? Well, debit utilities expense and credit cash, but in this case, we're not using the utilities in order to generate revenue. We're using the utility utilities in order to help us to generate the asset. Therefore, it's going to go to the factory overhead. And because again, we don't know exactly how to allocate it. So we're putting into that bucket of factory overhead, and then we will allocate it to the working process at a later time. We're going to credit the accounts payable. In this case, we're crediting the account. We put the utilities on account. We did it on account. So instead of crediting cash, we put it into accounts payable. Therefore, if we look at our general ledger, here's the 28 going up from 50 to the 78 going up by that 28. And that's 78,000. Now is, is what is in the factory overhead here on the trial balance? Next thing, direct materials use. So direct materials, that's pretty straightforward. If the direct materials are going to be used, it's going to go directly into in this case, work in process. So we know exactly where the direct materials are going, we can account account for that directly. And therefore, we can put it straight into the working process accounts, rather than having to put it into the factory overhead, which will then go into working process with some type of estimate. In that case, we're going to credit the raw materials inventory, it's going to come out of the raw materials inventory. So when we buy it, we put it, you can kind of think of it going in the corner. Then when we start to process something, we take it out and start to use it. That's when it transfers from raw materials to work in process. These are both our inventory type accounts of raw materials going down from the 368 down by the 214.5 to the 153.5. And then the working process is going up from 419 by the 214.5 to the 633.5. And those of course are reflected here on the trial bounce, trial bounce matching the general ledger. Then we have the indirect materials used, indirect materials. So indirect materials are still going to be part of inventory, but we're going to have to put them into factory overhead. Why? Because we don't know exactly where to apply them out again. Therefore, we're going to put them into factory overhead and then apply them to the working process using some type of allocation method. We have the raw materials are going to be credited. So we're taking it out of the raw materials. If we take a look at that transaction, same type of idea. It's coming out of raw materials, but we're going to put it instead of putting in the working process directly, first putting it into factory overhead, factory overhead going from 78,000 up by 68,000 to the 146,000. And we're putting in here instead of work in process, we will allocate it to work in process at a later time. Now you might be asking, what is the difference between indirect materials and direct materials? So again, that the indirect stuff is usually the smaller stuff where we can't track it as easily, or it would be too expensive to track it as specifically. Therefore, we're going to put it into the factory overhead and then allocate it out. All right, then we have the direct labor used. So direct labor, the labor in the actual production of the process, we can track that directly to the process. Therefore, we're going to put it into the working process part of inventory. And we're going to credit the factory payroll. Now, when you think of direct labor, you should be thinking of payroll that we're just processing payroll here. We're cutting out the idea of payroll taxes, not because they wouldn't be there, but because we don't want to complicate things at this point. And so we kind of have our payroll entry, we're going to credit instead of cash, we're crediting, in this case, the payroll payable to show that it is payroll. And instead of debiting payroll expense, like we normally would if we were processing payroll, it's not being used, the wages aren't being used in order to help generate revenue this time period, they're helping to generate the asset of inventory this time period. Therefore, we're debiting working process, the asset account of inventory type, rather than debiting the expense. So here we have it, it's going to go into the working process, working process going from 6.335 up by the 7.82, 1 million 4.135. That 1 million 14.5 is what is currently on the trial balance at this time. Then we have the indirect labor used indirect labor. So same idea. Instead of debiting, we're processing payroll once again, instead of debiting wages expense or some type of expense for the payroll process as we normally would, we are making the assets. But we don't know exactly where to apply it. If we have different departments, we don't know exactly where to put it might be the supervisor or something. Therefore, we're putting it into factory overhead. So we're debiting the factory overhead, and then we'll apply it out to the working process. And then we're going to credit the factory payroll payables, or if we paid cash, it would be too cash, right? If you work problems like this, they often will credit a payable account for a lot of things you might not see a payable account for. Why? Because if I just put cash here, it's not very specific by the journal entry what's been affected. If I put payable for payroll, then we know that this journal entry is related to payroll without a description. All right. So here's the transaction.